Little Lenders Benefit From Debit-Card Rule

From: Wall Street Journal

by Robin Sidel

It isn’t every day an 11-branch bank in Iowa gets a financial leg up on J.P. Morgan Chase & Co., Wells Fargo & Co. and Citigroup Inc.

West Bank Inc. in West Des Moines is likely to collect more money than the nation’s biggest banks each time a customer uses a debit card. The reason: About 7,300 of the 7,436 U.S. banks are untouched by the Durbin amendment, part of the Dodd-Frank financial overhaul.

The amendment, named after Sen. Richard Durbin (D., Ill.), roughly cut in half how much large banks like Bank of America Corp. can charge merchants for debit-card transactions. The move is expected to drain $6 billion in revenue from the industry this year.

Financial institutions with less than $10 billion in assets were left out of the rule. Those smaller banks have about 20% of the industry’s assets but tend to have lots of muscle outside the most-populous U.S. cities and states.

As a result, small banks and the middlemen that process their debit-card transactions will collect fees that are often three times the size of those imposed on cards issued by big banks. For example, a $100 sweater purchase made with a debit card would incur a fee of 95 cents on a card issued by a smaller bank, more than triple the 26 cents for debit cards issued by big banks.

Not surprisingly, big-bank executives are fuming about the law, which took effect in October. The rule is “a gross miscarriage of justice,” J.P. Morgan Chairman and Chief Executive James Dimon said earlier this month.

The nation’s largest bank by assets said the rule cost the New York company $350 million of revenue in the fourth quarter.

Small banks and credit unions that also are exempt from the Durbin amendment aren’t crowing. They say their new advantage will evaporate as merchants steer customers away from debit cards by dangling discounts for cash and other incentives.

The rule’s impact on consumers is hard to measure because merchants can either pass so-called interchange fees along or absorb some of them as lower profits.

But many merchants are unhappy. “I think the law should apply to all banks,” said Linda Phillips, who owns a drugstore in Lamoni, Iowa.

About half the debit-card purchases made in the store are on plastic issued by small, local lenders such as West Bank, a unit of West Bancorporation Inc.


In general, merchants in rural, remote states like Montana, where the No. 1 bank by deposits is First Interstate Bank, of Billings, a unit of First Interstate BancSystem Inc., are likely to get hit with bigger debit-card fees than merchants in Washington, D.C.

The three biggest banks in the nation’s capital are Wells Fargo, based in San Francisco, Bank of America Corp., of Charlotte, N.C., and PNC Financial Services Group Inc., of Pittsburgh.

Lawmakers exempted small banks from the rule partly because of worries it would put too much of a financial burden on community-based institutions.

Under the rule, the Federal Reserve capped merchant debit-card fees, known as interchange, at 21 cents per transaction, plus the potential of a few more cents to cover fraud costs. That is down from an average of 44 cents.

The split confuses many merchants, who are having a hard time figuring out whether the new rule is saving them money.

Some small-business owners have complained that companies that process their debit-card transactions aren’t passing on the savings triggered by the rule. Some businesses are paying more on low-priced purchases than they were before the rule.

Doug Gulling, chief financial officer of West Bank, offers no apologies for the higher rates. “That’s what happens when the government fixes prices,” he says.

The 119-year-old Iowa bank earned $1.5 million in annual revenue from debit interchange fees last year.

Merchants in rural areas often pay the highest fees on debit-card transactions. According to Heartland Payment Systems Inc., merchants in states such as Montana, Alaska and North Dakota are seeing the least benefit from the rule.

When customers buy toothpaste and bolts at the General Store in Goldendale, Wash., many pay with debit cards issued by local banks such as Riverview Community Bank, a unit of Riverview Bancorp Inc.; Sterling Savings Bank, a unit of Sterling Financial Corp.; and the Columbia Bank unit of Columbia Banking System Inc.

“Very rarely do I get a debit card from Bank of America” or other large banks hit by fee caps, says Kim Methe, who owns the store with her husband and parents.

Bankers say interchange rates will likely decline after April 1, when all U.S. banks and credit unions must offer merchants more choices of companies used to process debit-card transactions. That is expected to push interchange fees lower, because rivals of Visa Inc. and MasterCard Inc. usually charge less than the two giants.

“It is a short-term advantage,” says Jeffrey Szyperski, chief executive of Chesapeake Bank, a unit of Chesapeake Financial Shares Inc.

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