Fed Economist: Durbin’s Effect on Merchants ‘Varied,’ Consumer Benefits Not Yet Clear (May 6, 2013)
A new article from a senior economist at the Federal Reserve Bank of Kansas City explores the “varied” effects of the Durbin Amendment on merchants and suggests it’s unclear whether the rule achieved its goal of improving payment systems efficiency or helping merchants pass on saving to consumers.
The Durbin Amendment resulted in a Federal Reserve rule capping debit interchange fees when it went into effect Oct. 1, 2011, and banks the rule covers—those with $10 billion or more in assets—have seen their interchange revenue per transaction fall an average of 52 percent according to “The New Debit Card Regulations: Effects on Merchants, Consumers, and Payments Systems Efficiency.” Since the rule took effect banks have been promoting credit cards and prepaid cards more heavily, which could improve payment system efficiency as more unbanked consumers switch from cash to prepaid cards, notes author Fumiko Hayashi, senior economist, Federal Reserve Bank of Kansas City. However, she says it’s too early to determine the long-term effects Durbin will have on payment system efficiency.
For merchants, average interchange costs per transaction declined, but cost saving depends on a merchant’s size and sector. Utility companies, hotels and e-commerce merchants saw higher saving from interchange caps, while merchants with a high proportion of small-ticket transactions, such as coffee shops and fast-food operators, saw an increase in interchange fees, according to the report. That’s because a $5 signature debit transaction that cost 12 cents before the cap took effect rose to about 22 cents for a large bank-issued debit card, which tends to hurt merchants with many smaller transactions, Hayashi explains. And large merchants that previously received certain volume discounts on debit interchange lost that advantage.
While merchants overall have seen declines in interchange fee expenses as a result of the caps, it’s hard to measure whether consumers are saving as well since lower interchange is among many variables affecting slight price changes, according to Hayashi. Ultimately, consumer benefits from Durbin will depend on whether the pass-through of lower merchant costs is greater than the pass-through of lower bank revenue, Hayashi concludes.