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Larkin: Doomsday Predictions on Debit Card Fees Were Off

A year ago, credit unions and community banks said they faced a threat so dire it could shut some of them down and make it harder for the rest to lend.

Things could get so bad, one group said, that it might hamstring the economy “by hindering much-needed economic stability and growth.”

Another argued this development would have a “horrendous impact” and be “tragic, not only for credit unions and their members, but also for any users of debit cards.”

The law these bankers detested so much has been in effect for almost six months. The sky has not fallen.

In fact, by many measures, community banks and credit unions are thriving as never before. It’s a good lesson in evaluating lobbyists’ hype during a heated battle on the Hill with billions of dollars at stake.

What the bankers were fulminating about was the Durbin amendment, which passed in 2010, aiming to bring fairness and competition to the broken debit card market.

Senate Majority Whip Dick Durbin (D-Ill.) sought to limit the ability of card networks such as Visa and MasterCard to fix the “swipe fees” banks charge merchants every time a customer uses a debit card in their store.

Visa and MasterCard centrally fix these hidden fees for their banks so there’s never competition. Prior to reform, every bank in the country charged the same fees, which are among the highest in the world. Merchants had to fall in line if they wanted to accept plastic.

Though technology makes processing transactions ever cheaper and more efficient, the fees keep going up — $16 billion for debit fees alone.

These fees burden merchants struggling with razor-thin margins. For some, it’s their second-largest operating expense after labor. And the fees bump up the price of everything consumers buy, from gas to groceries — more than an estimated $400 per family a year.

Those are persuasive numbers. The Durbin amendment got an overwhelming 64 votes — including 17 Republicans. It required the Federal Reserve to cut the fees on debit cards from an average 44 cents a transaction to a more reasonable level that banks, merchants and customers could live with.

And Durbin exempted 99 percent of all banks — any with less than $10 billion in assets. The big banks were targeted for reform because they collect the overwhelming majority of swipe fees. However, after the financial crash and bank bailout, which made big banks so unpopular, they turned to small community banks and credit unions to be their public face, to try to persuade Congress the Durbin amendment would cripple them.

The banks began an intense lobbying effort in what would become one of the biggest battles in Congress last year. Sen. Jon Tester (D-Mont.) introduced a bill to delay implementation of the Durbin amendment, which he said could be “disastrous, particularly for rural America.” The bill was defeated.

Small banks argued that being exempt from the cap would actually hurt them because merchants would discriminate against their cards if they continued to charge the higher swipe fee. That simply hasn’t happened. In fact, it’s not possible: Visa and MasterCard won’t allow merchants to treat some banks’ cards differently than others, and merchants have neither the desire nor capacity to try.

The truth is, small banks are thriving post-reform. They are receiving higher swipe fees than their big bank competitors and are using the money to compete to get more customers who are disgruntled with the way big banks have treated them.

Last year 1.3 million new customers signed up at credit unions, twice as many as the year before, for a record of 92 million members.

While customers fled big banks — one in 10 decamped to a smaller bank last year — less than 1 percent of small banks’ customers left, according to the market research firm J.D. Powers, which surveyed 5,000 bank customers.

According to the American Banker, small banks’ swipe fees actually rose during the fourth quarter of 2011 after reform took effect, to a little more than half a billion dollars.

And Federal Reserve Chairman Ben Bernanke told a convention of community bankers their profits as a group rose last year. He also promised he would ensure all regulations, not just the Durbin amendment, didn’t put them at a disadvantage.

“We will work to maintain a clear distinction between community banks and larger institutions in the application of new regulations,” Bernanke said.

In a yearly ritual, the American Bankers Association has descended on Capitol Hill again this week complain about the Durbin amendment. This time, when they say small banks are hurting, don’t be fooled.

Peter Larkin is president and CEO of the National Grocers Association.

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