By Simon Johnson
It’s not hard to understand why large banks oppose any attempt to reform the financial arrangements currently surrounding credit cards and debit cards – in the duopoly run through Visa and MasterCard, big banks earn fees that far exceed their costs. This excess profit gap for debit cards would be substantially reduced by a Federal Reserve proposed regulation now on the table, which would implement the Durbin Amendment from the Dodd-Frank 2010 financial reform act. Senator Jon Tester (D., Montana) has proposed legislation that would delay and effectively derail implementation of the Durbin Amendment; the big banks are very much in his camp.
It’s much harder to understand why Independent Community Bankers of America (ICBA), the lobby group for small banks, is also working so hard for the Tester bill – because community banks are explicitly exempted from having to lower their fees and individual executives from at least some small banks publicly support the Durbin Amendment (e.g., see Senator Durbin’s letter to the ICBA last year).
The most plausible explanation is that ICBA is also one of the country’s largest issuers of credit cards and debit cards – so the representative of small banks actually has, in this regard, the incentives of a big bank.
This is a major conflict of interest that is undermining the interests of community bankers and distorting the political process. The ICBA needs to declare this conflict in a transparent manner and step back from its involvement in the Durbin-Tester debate. (UPDATE: The ICBA says that it derives no revenue from debit interchange, despite the fact that the leading industry sources list it as #20 for “Signature Debit Card Interchange” and #13 for “PIN Debit Card Interchange”; for a full explanation, see the note from Cam Fine that appears with the NYT.com version of this column.) It also needs to publish the full details of a “survey” that it uses to claim that most community bankers are against the Durbin Amendment.
The open secret of the American financial system is that while you and your friends might like to rail against banks over dinner, when the time comes to pay (at the grocery store or in the restaurant), you likely offer the merchant some form of plastic card. While this transaction may seem “free” to you, the merchant is charged a fee by the bank that issued the card – administered through a card network run by Visa or MasterCard (or American Express or Discover). Specifically, the merchant’s bank (known as the “acquirer”) has to pay “interchange fees” to the card issuing bank.
For debit cards – which draw directly from your checking account — these fees average 44 cents per transaction in 2009 (which was 1.14 percent of the relevant average retail transaction, according to the Fed, adding up to $15.7 billion economy-wide). The actual cost of these operations varies, mostly depending on the extent of potential fraud. But over our current systems, the cost is very low – on average it is 4 cents per transaction, according to the Fed. (For the most detailed publicly available study on the effect of lower interchange fees, look at this report on what happened in the Australian debit card payment system.)
The Durbin Amendment charged the Federal Reserve with lowering the debit card fees to a reasonable level that will cover costs, and the Fed is proposing to set this rate at not more than 12 cents per transaction. But this rate would apply only to larger banks. This is by design — the Durbin Amendment does not apply to banks with less than $10 billion in total assets – and the Fed has confirmed that this exemption can be implemented (see this statement by Fed Chair Ben Bernanke).
Global megabanks are now regarded as “too big to fail” by policymakers, these firms benefit from huge implicit government guarantees. When you talk with community bankers, they understand and are seriously irked by this arrangement.
But the lobbyists for these community bankers have been unwilling or unable to take on the big banks in any part of the political arena. The Durbin Amendment is a determined attempt to give the small banks an advantage – but the ICBA is not interested.
The ICBA argues that the “carve out” for small banks will not work – through moves by merchants and the card networks, these banks will be squeezed out of the payments system. This is not the view of the Federal Reserve Board staff, who have studied this closely.
And Senator Richard J. Durbin is quite categorical that,
“my amendment does not allow discrimination by merchants against issuers of debit cards. As is the case today, under my amendment a merchant who accepts Visa debit cards from large banks would be required to accept Visa debit cards from small banks and credit unions as well. They would also be prohibited from offering discounts for large bank cards and not providing the same discount for small bank cards from the same network.” (From his June 11, 2010 letter to the ICBA)
Perhaps there are legitimate reasons for the ICBA’s views, but it is also the case that the ICBA Bancard is a significant player.
This is ironic because the ICBA Bancard’s stated purpose is admirable — to help small banks compete.
“Today, ICBA Bancard also serves as an advocate for independent community banks in national policy discussions about payment systems. Part of our mission is to educate community banks about the need to actively offer payment services in order to retain their best customers, earn profitable returns, and be respected as full-fledged participants in the marketplace.”
By some rankings, ICBA Bancard are among the top 25 debit cards and credit cards in the country.
The ICBA’s main justification for its position is a “survey” of independent community bankers that shows they are opposed to the Durbin Amendment – i.e., lowering the debit fees of banks with which they compete. This result is odd, particularly given that a simple online poll by the American Banker showed that 60 percent of its readers thought that small banks would gain from the Amendment – as this was despite the fact that the ICBA tweeted that it wanted votes against Durbin.
The ICBA’s website does not reveal details who was surveyed, by whom, and what questions they were asked. It’s time for the ICBA to publish those details. Is this a real survey or another instance of lobbying posing as research? The ICBA should share all this information both with its membership and with the broader public.
An edited version of this post appeared this morning on the NYT.com’s Economix blog; it is used here with permission. If you would like to reproduce the entire post, please contact the New York Times.