The highly contentious Durbin Amendment went into effect only four months ago, but its effects are already reverberating throughout the banking sphere. Most visibly, some banks are raising their checking account fees: Chase nixed its debit rewards program, while Bank of America and Citibank raised fees or minimum balance requirements.
But the Durbin aftershocks don’t end there. The rise of prepaid debit, the credit union groundswell, the growing number of unbanked Americans, and the ever-improving credit card offers can all, in part at least, be traced back to interchange regulation. But for all the sound and the fury, many merchants say their profits have stayed flat or even fallen.
The New Hampshire House of Representatives wants to address that. Introduced in January, House Bill 1319 would go even further than Durbin in restricting the swipe fees that state-chartered banks can charge. The bill is well-intentioned, aiming to help struggling small businesses, but its passage could hurt more consumers than it helps.
Interchange regulation: a background
Every time a customer pays with a debit or credit card, the merchant is charged an interchange fee. The swipe fee varies by the type of retailer (bigger ones like Wal-Mart have lower fees than gas stations or mom-and-pop restaurants) and by the type of card (debit cards have lower fees than credit cards, and “classic” credit cards have lower fees than high-end cards like the Capital One Venture Rewards.) Pre-regulation, these swipe fees averaged 44 cents a transaction.
Enter Sen. Richard Durbin (D-Ill.) The eponymous amendment to the Dodd-Frank financial reform bill limited debit card swipe fees to 21 cents plus 0.05 percent of the transaction with the possibility of an additional cent, but it only affects debit cards issued by banks with more than $10 billion in assets. It exempts, therefore, almost all credit unions and community banks, credit cards, and prepaid debit cards.
The Durbin Amendment was implemented only in October, so its effects are still being played out. But in the short time since it went into effect, banks began pushing prepaid debit and credit cards aggressively to avoid the fee cap, and free checking became confined mostly to the institutions not affected by Durbin. Because of changes in pricing structures and a shift away from debit cards, many merchants actually saw their interchange costs rise.
New Hampshire tries to give the retailers their due
New Hampshire thinks it knows why retailers are being shortchanged. The amendment only applies to debit cards, and only to debit cards issued by banks with more than $10 billion in assets. In that state, that means Bank of America, TD, Citizens, and Sovereign. All New Hampshire banks, federally chartered or not, have assets under $2 billion.
New Hampshire wants to apply a swipe fee cap of 1 percent of the transaction to both credit and debit cards issued by all state-chartered banks, in hopes of actually lowering costs for retailers. This would create, essentially, a three-tiered system: Banks with more than $10 billion in assets would see their debit interchange fees capped at 21 cents, plus a little bit. Federally chartered banks with less than $10 billion in assets would face no caps at all.
State-chartered banks would have their swipe fees on both debit and credit cards capped at 1 percent of the transaction, potentially lower than Durbin’s cap.
Rep. John Hikel, the bill’s sponsor and an auto repair shop owner, argues that swipe fees put an onerous burden on small businesses, so that retailers “end up paying for the customers' free gifts and miles."
But we’ve heard this one before. If New Hampshire thinks Durbin has been ineffective, its fee cap will do no better (in fact, it will probably do much worse.) The cap would apply to exactly 18 banks in the state, leaving six entirely unregulated and the four large, nationwide banks subject only to Durbin’s limits. Because of its limited scope, it’s unlikely to have much effect on merchants’ costs.
Instead, it’s likely to drive business away from state-chartered banks. Facing lower revenues, state banks will be forced to increase their prices: eliminating free or rewards checking, raising credit card interest rates, or charging higher fees. New Hampshire’s residents will naturally move from the hindered state banks to the relatively unimpeded federally chartered ones, whose lower costs would enable them to offer more competitive products.
New Hampshire’s House Bill 1319 has good intentions. It’s not fair that a fee that’s largely out of consumers’ sight has such an effect on merchants’ costs, and therefore on prices. But the way to do it isn’t to regulate one small section of the industry while leaving the rest untouched. To do so would make Durbin’s distortions pale by comparison.
Tim Chen is the CEO and founder of NerdWallet, a personal finance website dedicated to bringing unbiased advice on the top credit cards, travel tips, and more.