Debit, Merchants and Durbin

Posted: May 7, 2012 | Updated: November 15, 2020

Today The Official Merchant Services Blog jumps feet first into an update on everyone’s favorite payment processing industry-focused legislation, the Durbin Amendment. We’ve covered the topic extensively since the blog began. You can read the Host Merchant Services in-depth and official analysis of the legislations itself by CLICKING HERE.

The legislation took effect October 1, 2011. With May beginning its seventh month of officially being on the books, some studies on its impact are starting to come to light.

CardHub’s Interchange Fee Study

According to a study released by Card Hub, the Durbin amendment will cost big banks $8.06 billion and smaller banks $329.4 million on an annual basis. The study, FOUND HERE, also notes in its 2012 impact assessment that the interchange fees charged by large banks (those with more than $10 billion in total assets) have decreased significantly since the Federal Reserve’s interchange fee cap took effect – falling 59.3% for signature transactions and 32.4% for PIN transactions.

The CardHub study is a work in progress and has been updated multiple times with new information as the Durbin Amendment made its way through Congress and ultimately took effect on October 1, 2011. On May 1, 2012 the Federal Reserve for the first time announced hard data on the law’s practical effect, and Card Hub’s 2012 Impact Study concluded that the law has ended up costing banks almost $8.4 billion on an annual basis.

Speaking of the Fed …

The Federal Reserve released statistics on May 1 summarizing the Durbin Amendment’s actual affect on the banking industry through the first six month’s of the law’s existence. The central bank found that in those six months of Durbin’s controversial cap on debit swipe fees being in place, banks subject to the cap saw their average fees drop by 45 percent. This makes some very simple mathematical sense when you consider that prior to Durbin the average fee was 43 cents per transaction, and Durbin itself set a hard cap of 21 cents and 5 basis points — essentially coming out to a 24 cents per transaction upper limit. The only wiggle room on the entire process is found in small banks, who are not subject to the hard cap, but those banks, according to the CardHub study only account for 15 percent of the total market share, so their variance will only have a small impact on the data. And as noted in the Federal Reserve’s data, small banks have held steady with their interchange fees on swipe debit, keeping them at the pre-Durbin height of 43 cents per transaction average.

S&P Releases a Study As Well

Standard and Poor’s released its Durbin Amendment Impact study as well, titling it “U.S. Banks are Changing Their Strategies to Mitigate The Financial Impact Of The Durbin Amendment.”

You can read the study at THIS LINK HERE. The basics of the study echo much of what Host Merchant Services‘ analysis predicted last year.

Essentially banks are going to make up the loss incurred by the hard cap in other areas. They are already well on their way to cutting out special programs and offers such as free checking and subsequently raising fees and instituting new fees into their services throughout their bank’s offerings. In short, banks simply moved the fees to other things consumers have to pay for.

The study concludes: “The Durbin Amendment has affected the financial industry in a number of ways, but perhaps not in the ways legislators intended. The benefits to consumers seem largely negligible as banks have sought other ways to generate revenue or cut services.”

Fuel is the Fire

Added to the 6-month impact studies, the Durbin Amendment also popped up into the news at the end of April due to a bold claim made by the Electronic Payments Coalition: Gas retailers were pocketing $1 billion in windfall from the Durbin Amendment and not passing any savings on to consumers. The math behind this claim is not nearly as direct as the headlines made it out to be. So follow along on this. According to the EPC:

  1. The Durbin amendment to Dodd-Frank legislation has seen interchange rates slashed by about 70% for debit card payments for fuel.
  2. With high gas prices likely to play a major role in this year’s presidential elections, the EPC commissioned research from Phoenix Marketing International on the prevalence of debit card use at the pump.
  3. A poll of 5166 consumers shows that 36% of all payments for fuel are made with a debit card – half of all non-cash transactions. The debit card share of both transactions and dollars is higher than any other payment method.
  4. With US Energy Information Administration figures showing that nearly 134 billion gallons of gas were sold in 2011, this means that approximately 48 billion gallons were purchased using debit, claims the EPC.
  5. Yet, despite the $1 billion a year this gives merchants “there continues to be no evidence that retailers are passing along savings,” according to the EPC.

That’s a bit of a leap. Using data from about 5,200 people in a poll and then tying it into the full figures from the US Energy Information Administration on fuel consumption ties two pieces of data together in a relationship that is not a direct connection.

CLICK HERE to view the full Phoenix Marketing Report.

Not so Fast

The National Association of Convenience Stores (NACS) and the Petroleum Marketers Association of America (PMAA) strongly condemned the findings of the EPC report. Both organizations claim the data is seriously flawed.

The NACS replied to the EPC report in multiple media outlets, stating the EPC the study is based on simple arithmetic that shows a lack of understanding about what causes high fuel prices and whether retailers even profit from them. NACS spokesman Jeff Lenard said: “When prices rise, retailers usually cut margins because they want to remain price competitive even if their wholesale costs increased. Data from OPIS shows that the average national markup (gross margin) for gas was 13.0 cents per gallon over the first quarter of the year. We estimate that expenses to sell gas are around 15 cents per gallon, so average retailers experienced an entire quarter where they lost money selling gas.”

Lenard also cited the NACS Fuels Report for 2012 as showing consumer price sensitivity with gas purchases, saying that consumers are aware of discounts and have used them. You can read that Fuels Report at THIS LINK HERE.

In Conclusion

Six months into the Durbin Amendment things are shaping up much like Host Merchant Services predicted. The legislation remains controversial, but that is largely due to the way the legislation was written with large enough loopholes for the banks to easily adjust to the restrictions of the reform. The gas price gouging story seems more sensational sizzle than quantitative substance. Proving that gas prices remain a hot button political talking point in election years, but the whole issue, to us here at Host Merchant Services, seems to be blown out of proportion when you consider that credit cards get used at the pump and they are not subject to any reform legislation currently.

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