TSG Metrics this week released research findings on the economics of PIN debit transactions before and after the new interchange fee regulations implemented on Oct. 1.

According to TSG, a management consulting company focused on the payments industry, impacts are likely to be negative, directly or indirectly, to large financial institutions, to some merchants, and in particular, to consumers.

“At the end of the day, I think it’s a simple math exercise – lost revenue must be replaced. In regards to credit and debit cards, the government has put large banks in particular in quite the pickle,” said Mike Strawhecker, director of marketing & strategic research, TSG. “Short term, smaller banks and credit unions have an opportunity to play off of the negative press of large banks and gain market share. But in the end, the revenue must be replaced with new fees from something.”

Known as the Durbin Amendment, the provision puts a cap on the fees that the largest U.S. debit card issuing banks (those with more than $10 billion in assets) can collect when their customers use a debit card to make a purchase.

Beyond the banks that issue cardholders' debit cards, there are thousands of companies that make debit card transactions possible, from merchant acquiring companies who provide merchants the ability to accept debit cards, to various technology and transaction execution players in between. Consequently, these companies collect fees for the services they provide - these are in addition to the regulated interchange fees.

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Findings included in the report:

• Merchants who sell predominantly small-ticket items (e.g. coffee shops) will see increases in their interchange fees compared to pre-Durbin costs. As such, merchants will not be inclined to actively push debit acceptance to consumers for small-ticket items.
• Banks are incented to push consumers toward debit usage for these smaller purchases and are no longer incented to drive toward higher-ticket usage, since no additional revenue is produced from a larger ticket. Additionally, banks are now more inclined to drive consumers toward credit card usage instead, which may be achieved by increasing fees for debit services (Bank of America and Citibank recently announced new fees).
• Consumers prefer using debit cards now more than ever as their volumes surpassed credit cards’ for the first time in late 2008. Despite this, consumers are now disenfranchised as merchants and banks will fight to push merchants toward using payment methods that favor their new situations.

As regulated banks add debit-related fees to customers, non-regulated banks have an opportunity to gain debit cardholder market share, using the heavy media coverage of the new fees (and its inherent portrayal of big banks as the ‘bad guy’) to their benefit.

“While some banks are attempting to make up for lost revenue related to the Durbin Amendment by increasing wildly unpopular consumer fees, other institutions are pursuing the exact opposite strategy by exploiting mass consumer resentment of fees and making a point of not increasing them,” said Sam M. Ditzion, CEO of Boston-based payments industry consulting firm Tremont Capital Group. “This strategy can work particularly well for the so-called ‘exempt’ institutions, those with under $10 billion in assets.”

Pre-Durbin:

• A consumer buys a $100 product from a merchant using a signature debit card issued by a large national bank.
• The merchant’s expense for accepting that transaction is $2.00 total in fees.
• The consumer uses their debit card free of charge from their issuing bank.

Post-Durbin:

• A consumer buys a $100 product from a merchant using a signature debit card issued by a large national bank.
• The merchant’s expense for accepting that transaction is $1.12 total in fees. The merchant saved $0.88 due to Durbin and has zero incentive to pass on its savings to consumers.
• The consumer’s issuing bank makes up the lost revenue by charging new debit usage fees to its customers.
• Customer still pays $100 for same product while now also paying new bank fees.

“The net result of the Durbin Amendment appears to be that big retailers will win big, big banks will lose big, some savvier small financial institutions will gain market share, and some consumers will pay higher bank fees while others won’t be impacted,” Ditzion said.

New bill will seek to repeal Durbin

Reps. Jason Chaffetz, Republican of Utah, and Bill Owens, Democrat of New York, plan to introduce a bill that would repeal the Durbin Amendment, according to MarketWatch.com. Chaffetz and Owens are the only sponsors of the bill thus far.

“As banks attempt to recoup their revenue and costs to consumers increase, we should see some favorable reconsideration in the Senate down the road,” Owens said. “This is something that will build as people see additional charges for use of their debit card.”

For more information on this topic, visit our regulatory issues research center.