Is interchange regulation the Godzilla of engagement? Hidden opportunities in a Post-Durbin world

Is Interchange Regulation the Godzilla of Engagement?

Some might scoff at comparing Godzilla — a terrifying, destructive monster that lays waste to all in its path — to a relatively tiny amendment within a larger law. But I stand by it. Just look out your window. The Durbin Amendment is wreaking some seriously major havoc on megabank interchange revenue right now.

What’s Durbin?

The Durbin Amendment was a last-minute addition to the 2010 Dodd-Frank Act and came with big implications. It capped debit interchange fees at 21 cents plus 0.05% of the transaction, and required that debit cards be processed on at least two independent networks.

The idea was to limit fees merchants pay on card transactions in case competition didn’t lower prices on its own, and to add a little more competition to the debit processing mix. Proponents also hoped it would lower prices for consumers by cutting retailers’ expenses.

How’s Durbin wreaking mutant-dinosaur-style havoc?

Whether or not it’s saving anyone money is up for debate, but it’s definitely costing megabanks big time. According to a report released by the Federal Reserve System, megabanks are losing a whopping $14 billion a year in interchange revenue.

And they’ve turned to their account holders to recoup that lost chunk of change. How? By doing unpopular things like getting rid of free accounts, imposing higher minimums for avoiding surcharges, and, obviously, nixing any debit card reward programs. Bank of America even charged a short-lived $5 fee to customers every month for the privilege of using a debit card.

Are community banks and credit unions in Durbin’s path of destruction?

In theory, the Durbin Amendment shouldn’t cost your institution a red cent. That’s because the amendment excludes financial institutions with less than $10 billion in assets, and only a handful of the more than 6,000 credit unions fall under that umbrella.

Although small banks and credit unions are technically exempt from the interchange revenue cap, Durbin doesn’t require debit card processing networks to differentiate between large and small financial institutions. Merchants could potentially bypass the higher interchange fee by opting to use a network that doesn’t differentiate.

In the short-term, however, this risk is low. Ultimately, Durbin represents an opportunity for community banks credit unions to further differentiate themselves from the megabanks.

The good news about Godzilla

Despite the potential long-term risks of Durbin, one clear win to come from the amendment is that the megabanks’ reaction — passing the cost to the consumer — made them look bad. People hate paying more for less, and they especially hate fees.

Case in point: The aforementioned $5 monthly debit card fee became the catalyst for Bank Transfer Day — an annual, nationwide movement that calls for customers to switch.

Community banks and credit unions have a serious opportunity here to leverage megabank customer dissatisfaction. They’re in a position to offer free checking accounts — and even reward accounts — that account holders won’t be able to find at the big banks.

Keep a lookout just in case

Here are a couple things to keep an eye out for in a post-Durbin world:

  • If the Durbin Amendment is repealed, be prepared to fight to keep those account holders that switched from big banks to your institution to avoid high fees. Ensure that your account holder service is top-notch, and that the accounts you offer reward them in exciting ways.
  • Megabanks aren’t your only competition; nonbanks are a threat too. Focus marketing campaigns so they can effectively reach all fronts.

Threats, especially asymmetric ones like Durbin, can create opportunity for those who know how to look for them instead of reacting from a place of fear.

 

Originally published on CUInsight.com, October 2015. 

 

Jeremy Foster
Jeremy Foster