The Dodd-Frank Wall Street Reform and Consumer Protection Act was enacted in response to the financial crisis of 2008 and the subsequent recession. Within it is a portion known as the “Durbin Amendment,” which affects how debit cards are processed. This seemingly small change to debit card processing – and interchange income – has, to say the least, been controversial.
While the changes made by Dodd-Frank were designed to end the problem of too-big-to-fail financial institutions, they also created many compliance burdens for credit unions. That’s because the rules apply equally across the board for large and small financial institutions.
Interchange Income, Dodd-Frank and The Durbin Amendment
A December 2015 report put out by the Government Accountability Office found that Dodd-Frank regulations were putting a strain on smaller financial institutions' resources. Everything from having to increase staff to the extra time required for complying with new rules is having an enormous impact.
The Durbin Amendment provision required the Federal Reserve to set rates for debit card interchange rates. The rule, which went into effect in late 2011, resulted in a loss in revenue that credit unions typically used to:
- Provide low-cost accounts to customers.
- Fight fraud.
- Maintain an efficient payments system.
While the provision was a boon for big-box retailers, landing them an $8 billion windfall in profits, credit unions found themselves in a different position. Durbin supporters argued credit unions would not be harmed, because institutions with less than $10 billion in assets were exempt. But they were not exempt from network routing and exclusivity provisions and their related administrative costs
Arbitrary Distinction Not a Solution
There are three key points relevant to Durbin that are particularly burdensome for credit unions.
- A limitation on debit interchange rates.
- A requirement that each debit card support at least 2 routing options.
- A general shift of control from the card issuer to the merchant.
Prior to the Durbin Amendment, swipe fees for debit card transactions averaged around 45 cents. Under the amendment, the Federal Reserve capped that rate at 21 cents per transaction, plus .05% of the transaction total. While these restrictions were targeted at institutions with $10 billion or more in total assets, that arbitrary distinction has created its own issues for credit unions, including a dramatic impact on the costs consumers bear for banking services.
What the Durbin Amendment has done is insert the government into the role of price fixer, creating competitive inequities in the financial marketplace. There’s simply no denying that Durbin has benefited merchants and harmed credit union consumers, who ultimately pay the price for their financial institution’s decreased revenue.
Though retailers promised to pass along their savings to consumers, unfortunately, that has not come to pass. In other words, funds that used to flow to the debit card issuer now remain with merchants.
What Lies Ahead for Interchange Income
While it's true the actual number of U.S. credit unions has decreased, overall memberships increased by 4.1% in 2016, the fastest growth since 1986. Today, slightly over a third of the country’s population is a credit union member – a good indication there will be continued strong growth in credit union debit card usage.
To better understand the dynamics of this key revenue source, credit unions will need to educate themselves on the possible regulation changes that may affect their institution’s interchange income.
The new administration has promised to reconsider Dodd-Frank and, presumably, the Durbin Amendment along with it. Current indications are that an outright repeal is unlikely, so all financial institutions will need to closely watch what new forms the regulations might take, including an expansion of credit card restrictions which would likely overshadow any relaxation of existing rules.