Community banks and credit unions are reporting lower debit card processing revenue as a result of financial reform laws, sparking concerns that they may be forced to impose new fees on customers to offset their losses.
Their experience stood in contrast to new reports published by the Federal Trade Commission and the Government Accountability Office, which suggest that a provision meant to protect small banks from debit card reform has indeed shielded them from any significant losses in revenue. The provision exempted small financial institutions from reducing their card-processing fees (or "swipe fees") but capped them for large banks. Regulators said the change prompted credit card companies to create a two-tiered pricing system in which small banks can continue charging customers higher rates each time they use their debit cards.
But community bank and credit union executives say the government reports are premature and don't necessarily reflect the impact on their businesses.
"The fees that the credit card processors pass on as revenue to banks like ours have definitely gotten smaller," said Denise Stokes, senior vice president of Sandy Spring Bank in Olney, Md. "Those companies took a hit when revenue dropped for the large banks, so they passed some of that loss on to us in the form of lower rates on processing fees. Our loss hasn't been huge, not as high as what the large banks have been hit with, but still, it's been significant."
Washington area banking executives said they expect the decline to continue in the coming years, which could prompt community banks and credit unions to follow in the path of many of their larger counterparts, adopting new fees and pulling back on free services to make up for lost revenue.
"When these banks start losing revenue, consumers often start losing free checking and start paying new processing fees," said Trish Wexler, a spokeswoman for the Electronic Payments Coalition, a Washington group representing credit unions, community banks and payment card networks. "In the end, when two large industries fight and go to lawmakers to try to resolve those differences, it's almost always the consumer who winds up with the short end of the stick."
In addition to capping swipe fees for large financial institutions, which took effect in October 2011, an amendment to the Wall Street reform law also included what's called the "routing and exclusivity" provision requiring credit card issuers to give merchants' banks more payment processing options. The intent is to drive down transaction costs for merchants as more processing companies vie to offer the most affordable services.
But some economists expect the provision will lead card companies to offer lower compensation for each transaction.
"The provision that could really start to lower interchange revenues for smaller institutions took effect in April, and in the only full quarter since then, the third quarter of 2012, we saw the first-ever decline in interchange revenue for credit unions," said Bill Hampel, chief economist for the Credit Union National Association, citing his group's latest quarterly survey. "We are concerned about whether that was a one-time downward shift or the first of several quarters of decline."
Such uncertainty prompted many banking officials to suggest it is too early to evaluate the law's impact on small banks and credit unions.
"It's kind of like saying, 'It hasn't snowed yet this year, so it's not going to snow,' " Bradford Thaler, vice president of legislative affairs for the National Association of Federal Credit Unions, said of the FTC and GAO reports. "It's too early to tell, but if anything, we're seeing evidence that the fees for big and small banks will eventually come together."