The Truth About Retailers and Swipe Fees

By Eric Sandberg, President & CEO, Texas Bankers Association

Earlier this month, George Keleman, president and CEO of the Texas Retailers Association, wrote an op-ed claiming interchange fees are hurting local businesses. He laments the fact that the Durbin amendment, a last-minute addition to the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act, which capped debit card fees below industry costs, could be repealed. This, he said, would hurt the Texas retailers who “strive to keep their prices low by seeking out efficiencies in every aspect of their business and constantly negotiating lower costs.”

Mr. Keleman, unfortunately, left out a few relevant details, including some historical perspective.

First, the Durbin amendment was tacked on to the Dodd-Frank Act at the last minute, despite being unrelated to the act’s policy goal of “Wall Street reform.” The addition was made without any hearings or analysis; it was sold on the promise of delivering lower prices to consumers in exchange for putting price controls on debit card charges for credit unions and banks of all sizes. Before the amendment, these debit fees were determined on a sliding scale based on the price of the item purchased and subject to the competitive free market.

Prior to the bill’s passage, retail lobbying associations claimed merchants would take all of the money they would save from lower debit card interchange fees and give it back to consumers.

In fact, according to the Richmond Fed, more than three-fourths of merchants surveyed did not change their prices after the Durbin Amendment was implemented, and 22 percent actually increased prices. Amazingly, just 1 percent of merchants reduced prices after the Durbin amendment was implemented. Study after study confirms that consumers are not seeing the savings retailers promised to pass along. One from the George Mason University School of Law, for example, found “there is no evidence that those cost savings have been passed-through to consumers.” Consumer polling confirms most shoppers haven’t seen lower prices.

Instead, retailers have kept $6 to $8 billion per year for themselves.

What about the banks? Unlike merchants, financial institutions do not simply pocket interchange revenues. Instead, in addition to the many costs of supporting a global payments network, they invest billions of dollars in developing the latest security technologies, such as real time predictive analytics, EMV, tokenization, biometrics and end-to-end encryption, to ensure payments are convenient, efficient, and secure as retailers shirk responsibilities to protect consumer data.

Each week seems to highlight yet another breach of merchant data and processing systems, uncovering customers’ personal information and sensitive payment numbers. The financial services industry has spared no effort in building trusted, secure networks that ensure consumer data is safe and protected.

What about consumers? Since the Durbin Amendment translates to increased costs for community banks and credit unions—these institutions typically have a lower number of debit transactions than covered issuers—it is more difficult for them to absorb costs compared to larger financial institutions with a higher number of transactions. Now, many banks have been forced to reduce popular customer products and services like debit card rewards and free checking accounts. Another hit to their wallets is the last thing Texas families need in these economically challenging times.

On top of this decrease in revenue, financial institutions are dealing with the provision’s expensive routing requirements, which not only burdens them with additional compliance costs, but also puts the processing choice with the merchant instead of consumers and the financial institutions representing them. Merchants often select the processor with the lowest cost, instead of a brand consumers may choose for its security.

As president of the Texas Bankers Association, I am in constant contact with the 464 banks in Texas, most of which are small community banks, and I completely disagree that these institutions are using the “debit reforms” to their advantage. Quite the contrary. Texas has lost more than 120 banks since the Dodd-Frank Act was passed and we know more banks are considering selling as I write this.

Merchant groups are understandably worried that Financial Services Committee Chairman Jeb Hensarling’s CHOICE Act might repeal the Durbin Amendment and put an end to the financial windfall they have benefitted from since 2010. Don’t let their claims fool you: ending this failed policy will support economic growth and help all Texans.