Small Banks Envision a Slew of New And Higher Fees in Durbin’s Wake

Despite being exempt from pending debit card interchange regulations, small banks seem to be convinced that their revenues are about to take a hit and are planning to raise account fees or reduce access to debit cards to compensate, according to survey results from the Independent Community Bankers of America.

Some 93% of community banks said they would be required to charge their customers for services that now are free, the Washington, D.C.-based trade group of small banks said Monday. The ICBA surveyed its 5,000 members by e-mail from Jan. 19 to Feb. 8 and received 1,190 responses, according to Viveca Y. Ware, senior vice president of regulatory policy.

Seventy-two percent of respondents said they would have to implement annual or monthly charges for debit card use. An ICBA news release also says 61% of respondents said they would have to impose a minimum-balance requirements and 50% said they would have to impose debit card transaction charges. Some 65% of respondents said they would need to either raise debit card qualification standards or close higher-risk accounts. Not quite 20% said they might even eliminate jobs or close branches.

Further, 72% of respondents said they would no longer be able to afford to offer free checking, and nearly 70% said they would have to charge for such currently free services as online or mobile banking.

“This survey confirms what we community bankers already knew, that implementing this deeply flawed proposed rule will hurt our Main Street customers because merchant costs associated with debit card acceptance will shift to consumers and small businesses,” ICBA president and chief executive Camden R. Fine said in the release.

The Federal Reserve Board is in the midst of preparing regulations to implement the so-called Durbin Amendment to the Dodd-Frank financial-reform law Congress passed last year, which calls for debit card interchange regulation for financial institutions with more than $10 billion in assets. The Fed’s draft proposal of caps of 7 to 12 cents per transaction could cut big issuers’ debit revenues by 70% or more.

Many community banks and credit unions have opposed the Durbin Amendment, which contains a so-called carve-out for smaller issuers’ interchange income. Ware says the reasons include the unknown reactions of the bank card networks, which set interchange rates, and the potential routing of more lucrative (for issuers) signature debit card transactions away from small issuers’ preferred networks onto PIN-based networks, which are cheaper for merchants. That’s because merchants will have more network choices and new freedoms to direct transactions under Durbin.

“The carve-out is on the books, but there is nothing in the law that says the network has to implement the carve-out,” Ware says. Visa Inc. last month did confirm that its next debit card interchange release would be two-tiered, with one reflecting the regulated rates for large issuers and the other, for the under-$10-billion issuers, largely similar to the current rate schedule. But MasterCard Inc. has not yet revealed its plans, and both networks typically update their interchange schedules twice a year. That means the continuation of two-tiered schedules could be assured only for the short term.

Visa and MasterCard’s largest customers thus will pressure the networks to narrow the revenue and cost-burden gap between large and small issuers, Ware believes. “In today’s environment, all of the issuers receive the same interchange regardless of size,” she says. Once the Fed’s final rules are in place, “the largest issuers won’t get the same benefit, yet they will be expected to pay the major cost of maintaining the network. This decrease may not happen overnight, but it’s going to happen over time.”
 
Ware also predicts merchants will use their new network and transaction-routing options to the detriment of small issuers. “They’re going to find a way to bypass the community bank, credit-union network,” she says.

Durbin Amendment chief sponsor U.S. Sen. Richard Durbin, D-Ill., did not immediately have a statement about the ICBA survey but released a response on Monday to a Feb. 8 letter from the American Bankers Association, the leading banking industry trade group, to its members and Congress. Durbin accused the ABA of continuing “the banking industry’s practice of misleading, distorting, and using scare tactics when discussing the new interchange law.” Regarding alleged harm to small banks, he said, “Neutral observers disagree. After years of considering the issue, Congress has now recognized that interchange reform is necessary and has passed a reform law that should be given time to work.”
 
Although the Fed’s rule-making process to implement the Durbin Amendment is well under way, the Republican-controlled House Financial Services Committee has a hearing set for 10:00 a.m. Eastern time Thursday to consider the interchange issue. The witness list includes a Fed board member, merchants (including a 7-Eleven Inc. executive), representatives of credit unions and banking groups and a pro-interchange-regulation merchant group, and Visa’s general counsel.