Swipe Fee Fallout Has Small Banks Relishing Rare Advantage Over Wall Street

Last year's wild legislative melee over debit card swipe fees featured a curious contradiction: Although big Wall Street banks stood to lose the most from new swipe fee rules, it was small banks and credit unions that served as the public face of the regulatory opposition. And new data from SNL Financial adds evidence to the claim that small banks were getting played.

Senate Majority Whip Dick Durbin (D-Ill.) authored a bill that limited the total amount that banks could charge retailers for the privilege of accepting debit cards. Although the fees were not widely understood by the general public, they amounted to $16 billion a year in revenue for the financial industry, with half of that total flowing to just 10 banks. The fees are costly for both retailers and consumers alike, with stores passing on as much of their debit card costs as possible to customers in the form of higher prices.

Durbin successfully attached his bill to the 2010 Wall Street reform overhaul and carved out a major loophole for small banks in an effort to avoid a lobbying onslaught from them -- a far more sympathetic body of corporate constituents than the bailed-out megabanks. The move was not simply a public relations effort. Individual small banks are overpowered by lobbyists for multitrillion-dollar Wall Street firms, but as a nationwide coalition, the Independent Community Bankers Association is a tremendous political force. Only a handful of members of Congress have a giant bank headquartered within their district, but they all have a small local bank.

As the Durbin legislation was written, banks with less than $10 billion in assets can continue to charge whatever debit card fees they wish. Banks above that threshold are subject to new regulations from the Federal Reserve that effectively cut the average swipe fee in half. Yet despite the special consideration, small banks threw in their lobbying lot with Wall Street and came very close to repealing Durbin's rule in the summer of 2011.

At the time, the ICBA and many small bankers insisted that, although they were exempt, the card networks Visa and MasterCard would be unable to process different payment prices for small and big banks. When the card networks did roll out new "two-tiered" pricing -- one tier for big banks, another for small banks -- the ICBA argued that the Durbin amendment would put downward pressure on swipe fees, and that market forces would eventually force even community banks to charge lower rates.

That hasn't happened yet, but small banks still worry that time will not be kind to their fee revenues. But according to financial industry data provider SNL Financial, several banks are now choosing to stay smaller in order to avoid losing money on debit cards. SNL Financial also operates a robust newsroom, and in an article accompanying the data release, reporters Kevin Dobbs and David Hayes quote Prosperity Bancshares CEO David Zalman saying that his company actively held back its asset growth to avoid becoming subject to the debit card caps, which Zalman said would cost his firm about $5 million a year.

"We were really focused at year-end not to be over $10 billion in size, and so we've managed our balance sheet," Zalman said, according to SNL Financial. "And you'd say, well, why didn't we want to be over $10 billion in size? It's primarily because of the Durbin amendment."

Prosperity was one of seven banks hovering near the $10 billion threshold at the end of 2011. Three of those banks -- MB Financial, Citizens Republic Bancorp and Sterling Financial -- actually shed assets over the course of the year rather than making more profitable loans or investments that would have expanded their asset base. MB Financial actually shifted from a position slightly above the $10 billion mark to a level just below it by the end of 2011. Two others, Trustmark and Central Bancorp, grew their assets by less than 2 percent over the course of the year.

The ICBA, which was not immediately available for comment for this article, has long emphasized that it could take a long time for their prediction that swipe fee cap will eventually hurt small banks to be realized. Until then, however, small banks are enjoying a competitive advantage over Wall Street in the debit card market.

Comments

[Jay Gould]

04:36 PM on 03/06/2012

Banking is now costing Americans considerably more than it did a decade ago. Considering the fact that the cost to banks of maintaining checking accounts has also risen quite significantly for the period, this news should not come as a surprise. And I don't think that we've seen the end of it. The Durbin Amendment and other regulations have cost banks billions of dollars in lost revenue and, whatever one may think of it, they will do their best to make up for these losses. And they will succeed. For a closer analysis: http://blog.unibulmerchantservices.com/the-cost-of-regulation-free-checking-gone-bank-fees-up

[tainteddr34ms]

06:15 PM on 03/02/2012

Good job, Durbin. That's a pretty clever incentive to discourage the growth of any more too big to fail banks. We already have more than enough of them.

[cbsguards]

04:47 PM on 03/02/2012

This create less Banks too big to fail. Overall I fond this is a good thing the banks payign attention not just greed

[phatemu]

04:38 PM on 03/02/2012

Use cash. 1 ATM and 1 CC is sufficient.

[fortressfountain]

04:34 PM on 03/02/2012

Spending is better than hording? Depends on what you are buying.
If you use cash and trade-you will always have an advantage over the banks.

[WasteNJ]

02:53 PM on 03/02/2012

If some smaller banks are staying below the threshold to avoid the fees charged to bigger banks, and have to spend money to stay there, I don't see it as a bad thing. Spending money s better than hoarding it, and if they spend it on employees, that is the desired effect, right?

[Johnny Hempseed]

02:30 PM on 03/02/2012

Do they call it a swipe fee because they're swiping your money?

Credit unions FTW!

[VPN]

03:21 PM on 03/02/2012

I was thinking how appropriate, calling them "swipe fees" is, thats exactly what they are doing swiping from their customers with those fees.

[SensibleOne]

01:55 PM on 03/02/2012

Credit unions are the way to go. Much better service, too.

[datenutloaf]

01:25 PM on 03/02/2012

Je$u$ $aves at BofA ------The bank for those who espouse the tenets taught in the Go$pel of Pro$peritarians............

Y'know--- where Je$u$ tumped over the money-changers tables NOT because they were defiling the temple , but because they were NOT charging a high enough exchange rate!

[Bertski]

01:09 PM on 03/02/2012

http://moveyourmoneyproject.org/ - to borrow a slogan from Nike, "Just Do It."

[alexunlv]

01:06 PM on 03/02/2012

"Three of those banks.....actually shed assets over the course of the year rather than making more profitable loans or investments that would have expanded their asset base."

Is this a bad thing? They shed assets to avoid "profits or investments" that would yield LESS than the benefits of staying under the 10B mark. In other words, those "profits and investments" were obviously worth less than the $5 million in debit card fees it costs Mr. Zelman for being above the debit card cap.

Simplified: Why would you want to make an extra $10 if it will end up costing you $100 to make those $10 bucks?

Staying under the 10B will always be beneficial for these small banks so long as the missed opportunity profits are below the cost of the debit card fees. Once those investments yield more than the debit card fees - the banks will go over the 10B mark.

[ema123]

01:19 PM on 03/02/2012

True it all comes down to profit margin.

[REMEMBER2050]

01:02 PM on 03/02/2012

If you have a US Bank account, keep an eye out for new fees which I believe are $2.51 for making phone payments on bills. I incurred three of these last month--first time I've ever seen those charges, and they fell directly on the three dates in which I paid bills via phone.

I do need to call and make sure I understand correctly what these charges are for, but you can bet I'm changing banks immediately if this is correct. There's been plenty of publicity about other large banks screwing us which resulted in such a backlash some were rescinded, but I wouldn't be a bit surprised if US Bank is trying to sneak in a fast one here.

[Andy McDonald]

12:51 PM on 03/02/2012

I switched to a credit union and I haven't looked back. Except for the widespread availability of ATMs, it's way better than my previous bank. I won't say the name, but it rhymes with Disgrace.

[BLinCincinnati]

02:28 PM on 03/02/2012

Do people really use ATMs that often? I probably use one maybe once a month to pull out some cash. But I buy most things with my debit card, and many places allow you to get cash back if you wanted. So far PNC has not charged me a single fee in a long time so I stick with them, but if I moved, a credit union with even a single ATM near my home would be more than I'd ever need.

[Madagain]

03:36 PM on 03/02/2012

Often, grocery stores, department stores, and some gas stations, let you use their atms without a service charge, you only need to find the ones in your area. Credit Unions are there for the people, big banks ride on the people. Those multi million dollar bonusses, don't come from the exects pockets, just the smaller customers, trying to save a dime.