Despite Exemption, Small Issuers Expect Significant Decline in Interchange Revenue After Implementation of Durbin Amendment Provisions
Initial Findings from 2011 Debit Issuer Study Show Small Issuers Question Effectiveness of Interchange Cap Exemption
HOUSTON, TX – Apr 26, 2011 — The 2011 Debit Issuer Study, commissioned by PULSE, finds that small debit card issuers, including community banks and credit unions, on average expect a 73 percent decrease in debit interchange revenue as a result of pending interchange fee rules. While these issuers with less than $10 billion in assets are exempt from the regulations proposed by the Federal Reserve Board, they are critical of the interchange cap and skeptical that the exemption will be effective.
"The study results support broad industry consensus that the proposed interchange cap will likely affect even exempt issuers. However, the impact small issuers say they are expecting is greater than many anticipated," said Steve Sievert, senior vice president of PULSE, which has commissioned the industry benchmark Debit Issuer Study for the past six years.
One exempt issuer in the 2011 Debit Issuer Study responded, "We see no impact in 2011, but over time (in 2012-2013), we expect interchange income will decrease due to marketplace pressures lowering the interchange rate." Another exempt issuer commented that, "Even if a network were to offer a two-tier pricing schedule, the shift in market conditions would eventually require the interchange rate for exempt institutions to be reduced."
In addition, issuers believe the Federal Reserve's proposed network exclusivity provisions are unnecessary given the interchange cap. Almost all issuers prefer the alternative that would require two unaffiliated networks on each debit card, given that many are already compliant with the requirement. Issuers also stated that the alternative requiring two network choices for each method of authorization – two for PIN and two for signature – would create major operational challenges without providing any value to consumers.
Impact on Demand Deposit Accounts
Given the anticipated decline in interchange revenue, issuers expect the Durbin Amendment to significantly impact their demand deposit account (DDA) business. Financial institutions believe the economics of the DDA require a fundamental re-evaluation – even more so with recent changes to Regulation E regarding debit-initiated overdrafts – and several issuers are considering elimination of certain programs and services, as well as charging consumers additional fees to recoup lost revenue.
Among surveyed issuers, 54 percent of regulated institutions and 27 percent of exempt issuers report they are evaluating additional fees or reducing benefits. Exempt issuers report they are considering reducing rates on high-yield checking accounts, eliminating ATM fee rebates and charging account holders for the service of having a checking account.
One product many issuers are assessing is debit rewards. Both regulated and exempt issuers expect to eliminate or significantly reduce benefits provided by their current rewards programs.
"We are planning to reduce the earn rate, raise the annual fee and eliminate the first year annual fee waiver," said one regulated issuer.
Additionally, many issuers indicate they will encourage increased use of PIN debit instead of signature debit, contrary to what many have done in the past. Following implementation of the proposed rules, with interchange rates for PIN and signature debit transactions likely being the same for regulated issuers, PIN transactions will have a better bottom-line contribution for issuers.
"There is a possibility that we will push PIN over signature, since there is no income differential and PIN costs less in terms of fraud and back-office processing," said a regulated issuer.
The expectations of issuers surveyed suggest the impact of the Durbin Amendment will be far-reaching, regardless of the interchange exemption granted to issuers with less than $10 billion in assets. Consumers will no doubt feel the effects of this new legislation, but it is unclear if they will ever realize the positive impact projected by the authors of the legislation.
"There is unanimous agreement among financial institutions we surveyed that the Durbin Amendment will adversely impact consumers," said Tony Hayes, the Oliver Wyman partner who served as project lead on the study. "To recoup lost revenue, issuers will charge higher fees for banking services, reduce debit card benefits – such as rewards and zero liability protection – and introduce restrictions on how debit cards can be used."
About the Study
The 2011 Debit Issuer Study is the sixth installment in the study series. Additional findings from the study will be released in May. The study provides an objective fact base on debit card issuer performance and financial institutions' outlook for the debit card business. Fifty financial institutions – including large banks, credit unions and community banks – participated in the 2011 study, conducted by Oliver Wyman. Collectively, the participants issue 50 million debit cards and operate 36,000 ATMs. The sample is representative of the U.S. debit market in terms of institution type, location and debit network participation.
PULSE, a Discover Financial Services (NYSE: DFS) company, is a leading debit/ATM network, serving more than 4,400 banks, credit unions and savings institutions across the United States. The network links cardholders with ATMs and POS terminals at retail locations nationwide. Through its global ATM network, PULSE provides worldwide cash access for Diners Club and Discover cardholders through hundreds of thousands of ATM locations. The company also is a source of electronic payments research and is committed to providing its participants with education on emerging products, services and trends in the payments industry. For more information, www.pulsenetwork.com.