Community Banks Dodge Swipe-Fee Bullet, for Now

Photograph by Aaron M. Sprecher/Bloomberg

In the roster of battlegrounds over U.S. financial reform, the battle over the swipe fees that banks charge retailers to process debit-card transactions ranks as among the most heated. About 500 lobbyists for retailers and banks descended on Washington last year, with some $30 million spent on everything from ads in the capital subway system to political donations, Bloomberg Businessweek reported at the time. Banks and their supporters argued that a fee cap would particularly harm community banks, despite the fact that they were exempt from the regulation. The cap went through nonetheless. Now data from the first three months show that small banks have so far escaped unscathed.

First, some background: The Dodd-Frank financial reform tasked the Federal Reserve with determining what fees are “reasonable and proportional” to what it costs banks to process debit-card payments. Before the reforms, banks had been charging an average of 43¢ a swipe, which brought in $16 billion a year in fees. In December 2010, the Fed proposed a draft rule that lowered the fees to an average of 12¢ per transaction. After all the lobbying, the Federal Reserve issued the final rule in June 2011, capping the average fee at 21¢ a swipe.

To get the regulations through, the Durbin Amendment exempted banks and credit unions with assets of $10 billion or less. A key part of the argument by the American Bankers Association and legislators who opposed the fee cap was that while the smaller banks may technically be exempt, they would in reality be forced to charge less, too.

The new rules went into effect on Oct. 1. On Tuesday, the Federal Reserve released a new batch of data that shows the average interchange fees charged by big banks did indeed drop by half. The fees charged by the exempt community banks, however, haven’t budged so far. Indeed, some community banks have been working to make sure they don’t amass more than $10 billion in assets specifically to maintain the fee advantage.

The American Bankers Association says it’s too soon to be assured that community banks won’t be affected because a part of the rule that gives merchants more choice over which network they use to process payments just went into effect on April 1. “Due to the Durbin Amendment’s phased implementation, it’s impossible for this initial report to fully reflect or predict the consequences of upending the marketplace with government price controls,” the group said in a statement. The Independent Community Bankers of America concurs, saying: “A model in which community bank debit cards cost twice as much to accept as large bank debit cards because of a government intervention is simply not sustainable.”

The Fed data didn’t touch on the most prickly issue of them all—whether or not retailers passed any of their savings on to consumers.

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