Debit Card Interchange Fees Research Articles

An empirical analysis of debit card interchange fee regulation: Evidence from Brazil

An empirical analysis of debit card interchange fee regulation: Evidence from Brazil

Credit and Debit Card Interchange Fees in Various Countries

Credit and Debit Card Interchange Fees in Various Countries

Competition and complementarities in retail banking: Evidence from debit card interchange regulation

Retail banking is a complex industry in which depository institutions bundle various services and may have market power. We use a recent regulation as a natural experiment to provide broad evidence about competition and the importance of bundling in retail banking. That regulation, which resulted from the Durbin Amendment to the Dodd–Frank Act, capped debit card interchange fees for banks with over $10 billion in assets. Using a difference-in-differences identification strategy, we document and quantify the resulting decline in interchange income for treated banks. We further find that treated banks offset more than 90% of the lost interchange income through increases in deposit fees for account holders. We argue that the ability to adjust deposit fees indicates (i) that treated banks have market power with respect to their account holders and (ii) strong complementarity between debit card transactions and deposit accounts. These results are robust when limiting the sample to banks near the asset threshold or using control banks with low direct competition with treated banks. Treated banks neither reduced costs nor strategically avoided the $10 billion threshold.

The Impact of Price Controls in Two-sided Markets: Evidence from US Debit Card Interchange Fee Regulation

We study the pricing of deposit accounts following a regulation that capped debit card interchange fees in the United States and provide the first empirical investigation of the link between interchange fees and granular deposit account prices. This link is broadly predicted by the theoretical literature on two-sided markets, but the nature and magnitude of price changes are key empirical issues. To examine the ways that banks adjusted their account prices in response to the regulatory cap on interchange fees, we exploit the cap's differential applicability across banks and account types, while accounting for equilibrium spillover effects on banks exempt from the cap. Our results show that banks subject to the cap raised checking account prices by decreasing the availability of free accounts, raising monthly fees, and increasing minimum balance requirements, with different adjustment across account types. We also find that banks exempt from the cap adjusted prices as a competitive response to price changes made by regulated banks. Not accounting for such competitive responses underestimates the policy's impact on the market, for both banks subject to the cap and those exempt from it.

A Closer Look at Payment Cards

This essay takes a closer look at the U.S. payment card system, primarily debit cards. I examine the bundle of transactional services this and other types of payment cards provide. My goal, in large part, is to assess the competitive effects of the debit card interchange fee cap under the Durbin Amendment to the Dodd-Frank Act (2011). In addition to a binding fee cap, it mandated a change in the way the fee is metered. A maximum per transaction fee of 20 cents, binding for most transactions, replaced a typical two-percent negotiated fee. I test hypothesis that the cap caused or contributed to a decline in the willingness of payment card intermediaries to invest in security, possibly increasing the system’s vulnerabilities to the kind of data breaches that have become ever more commonplace.

Understanding Marginal Costs in Two-Sided Markets: Implications for Debit Card Interchange Regulation

The paper reviews the economic literature’s treatment of marginal costs in two-sided markets is discussed below with particular emphasis on literature discussing the payment card market. An underlying issue explored in this paper is the how financial reform legislation’s use of the term “incremental costs” compares with the use of the term in the literature and with the definition of marginal cost. Also discussed is the significance of the two-sided market phenomena to efficient pricing decisions, the need to consider costs incurred on both sides of the market, and estimates of the marginal cost to banks of processing debit card payments. The paper will conclude with a summary of five key principles that the Federal Reserve should apply when developing their proposed debit card interchange fee regulation.

The Costs and Benefits of Half a Loaf: The Economic Effects of Recent Regulation of Debit Card Interchange Fees

This study examines one section of the Dodd-Frank “Wall Street Reform and Consumer Act” directing the Federal Reserve Board to develop new regulations for the “interchange fees” charged by banks that issue debit cards for debit card transactions. On June 29, 2011, the Board issued its final rule, “Regulation II: Debit Card Interchange Fees and Routing,” which became effective on October 1, 2011. The standards set out in Regulation II cap debit card interchange fees at $0.21 per transaction, plus 5 basis points (0.05 percent) of the transaction’s value, plus a $0.01 charge per transaction for debit card issuers that meet certain fraud prevention standards. These standards apply only to transactions with debit cards issued by financial institutions with assets of $10 billion or more, covering about two-thirds of all debit transactions. Our analysis found that the new cap on debit interchange fees reduced the fee on the debit transactions covered by the regulation from an average of $0.51 per transaction (with large variations) to $0.24 (with less variation). This overall reduction saved consumers and merchants an estimated $8.5 billion in 2012; we further estimate that $5.87 billion of those 2012 savings were passed along to consumers in lower prices, while merchants retained $2.64 billion. Moreover, we also estimate that the $8.5 billion in cost savings was sufficient to support 37,501 new jobs. However, the $0.21 fixed fee per transaction under Regulation II raised interchange fees on transactions of $15 or less; and on the average small transaction of $7.50, the fee as a share of the transaction exceeds the profit margins on such transactions for six industries that depend on small purchases (including supermarkets, groceries, convenience stores, gas stations and pharmacies). If Regulation II had not raised interchange fees on small debit transactions, consumers and merchants would have saved an additional $690 million in 2012, which could have supported 3,044 more jobs. The new standards do not affect credit card transactions. Our analysis found that if credit card interchange fees on the two dominant, four-party payment networks, Visa and MasterCard, were capped at the maximum $0.24 per-transaction rate set by Regulation II for covered debit transactions, consumers and merchants would have saved an additional $22.4 billion in 2012. Consumers would have captured $15.4 billion of those benefits, and their additional spending could support 56,733 jobs; while merchants could be expected to retain roughly $6.9 billion of those cost savings, and their additional spending and investments could support another 41,918 jobs.

Bank Profitability and Debit Card Interchange Regulation: Bank Responses to the Durbin Amendment

The Durbin Amendment to the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 alters the competitive structure of the debit card payment processing industry and caps debit card interchange fees for banks with over $10 billion in assets. Market participants predicted that debit card issuers would offset the reduction in debit interchange revenue by increases in customer account fees. Some participants also predicted that banks would cut costs in response to the law by reducing staff and shutting down branches. Using a difference-in-differences testing strategy, we show that debit interchange fee income fell for treated banks, leading to a fall in noninterest income. We also find that banks only partially offset this loss with deposit fees. We document that treated banks neither reduced costs nor strategically avoided the $10 billion threshold.

Bank Profitability and Debit Card Interchange Regulation: Bank Responses to the Durbin Amendment

The Durbin Amendment to the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 alters the competitive structure of the debit card payment processing industry and caps debit card interchange fees for banks with over $10 billion in assets. Market participants predicted that debit card issuers would offset the reduction in debit interchange revenue by increases in customer account fees. Some participants also predicted that banks would cut costs in response to the law by reducing staff and shutting down branches. Using a difference-in-differences testing strategy, we show that debit interchange fee income fell for treated banks, leading to a fall in noninterest income. We also find that banks only partially offset this loss with deposit fees. We document that treated banks neither reduced costs nor strategically avoided the $10 billion threshold.

Bank Profitability and Debit Card Interchange Regulation: Bank Responses to the Durbin Amendment

The Durbin Amendment to the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 alters the competitive structure of the debit card payment processing industry and caps debit card interchange fees for banks with over $10 billion in assets. Market participants predicted that debit card issuers would offset the reduction in debit interchange revenue by increases in customer account fees. Some participants also predicted that banks would cut costs in response to the law by reducing staff and shutting down branches. Using a difference-in-differences testing strategy, we show that debit interchange fee income fell for treated banks, leading to a fall in noninterest income. We also find that banks only partially offset this loss with deposit fees. We document that treated banks neither reduced costs nor strategically avoided the $10 billion threshold.

Price Controls on Payment Card Interchange Fees: The U.S. Experience

The Durbin Amendment to the Dodd-Frank financial reform legislation capped debit card interchange fees for banks with assets of $10 billion. Credit card and prepaid card interchange fees were not regulated. The cap, which took effect on October 11, 2011, cut the average interchange fee for covered banks from $0.50 to $0.24 per transaction. The cap reduced annual revenues from interchange fees by between $6 billion and $8 billion. Covered banks have recouped these losses in indirect ways. In particular, they have: - Reduced the availability of fee-free current accounts. The total number of banks offering free current accounts fell by 50% between 2009 and 2013. In comparison, fee-free banking actually increased at banks not subject to the Durbin Amendment. - More than doubled the minimum monthly holding required on fee-free current accounts between 2009 and 2012, from around $250 to over $750. - Doubled average monthly fees on (non-free) current accounts between 2009 and 2013, from around $6 to more than $12. - These fee increases and loss of access to free checking contributed to an increase in the unbanked population of approximately 1 million people, mainly among low-income families. - Consumers have shifted their payment usage from debit cards to credit and prepaid cards, which were not subjected to price controls. Most large retailers have seen significant cost reductions as a result of the Durbin Amendment, yet to date there is no evidence that those cost savings have been passed-through to consumers. Interchange fees have increased for merchants that make small-ticket transactions, as networks have eliminated discounts that they previously received, and smaller merchants have not seen any reduction in their merchant discount rates. Thus, while consumers have seen large and immediate increases in the cost of bank accounts, to date there is no evidence of reduced prices at the pump or checkout. We estimate that as a result of the Durbin Amendment, there will be a transfer of $1 billion to $3 billion annually from low-income households to large retailers and their shareholders, which have been the primary beneficiaries of the Durbin Amendment to date.

MEASURING SOME EFFECTS OF THE 2011 DEBIT CARD INTERCHANGE FEE REFORM

In October 2011, new rules governing debit card interchange fees became effective in the United States. These rules limit the maximum permissible interchange fee that an issuer can charge merchants for a debit card transaction. Using new data from the Federal Reserve of Boston, Richmond, and San Francisco 2012 Diary of Consumer Payment Choice, this article provides simple calculations that identify the transaction values by consumer expenditure category for which interchange fees became higher and lower under the new rules. (JEL G28)

The Impact of the U.S. Debit Card Interchange Fee Caps on Consumer Welfare: An Event Study Analysis

The cost to merchants of taking payment on debit cards declined by more than $7 billion annually as a result of the Durbin Amendment to the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, while the effective cost to issuers of providing debit card services to consumers increased by a corresponding amount. This paper reports an event-study analysis of stock prices to determine the impact on consumers of the Durbin Amendment. Did consumers gain more from cost savings passed on by merchants, in the form of lower prices and better services, than they lost from cost increases passed on by banks, in the form of higher prices or less service? We find that consumers lost more on the bank side than they gained on the merchant side. Our estimate is that, based on the expectations of investors, the present discounted value of the losses for consumers as a result of the implementation of the Durbin Amendment is between $22 and $25 billion.

Assessing the Durbin Amendment's Debit Card Interchange Fee Cap: An Application of the 'Tourist Test' to US Retailer Data

Payment cards have been a perennial source of debate among economists. That debate received additional fodder in 2010 with passage in the US of the Durbin Amendment, which targets debit card interchange fees. I assess the Durbin Amendment, testing the interchange fee cap it imposes against the “tourist test” proposed in the theoretical literature. I first calculate merchant incremental payment processing costs across payment instruments. While I find that debit card bank fees are higher than bank fees for other instruments, a comparison of other incremental costs softens that conclusion. With the cost estimates in hand, I then compare the interchange fee suggested by the “tourist test” with that set by the Durbin Amendment. The empirical assessment of the tourist test highlights the importance of the instrument whose costs are “avoided” – whether cash or check is used dramatically alters the test and indicates that an optimal one-size fits-all interchange fee cap will be difficult to achieve.

Assessing the Durbin Amendment’s Debit Card Interchange Fee Cap: An Application of the “Tourist Test” to US Retailer Data

Payment cards have been a perennial source of debate among economists. That debate received additional fodder in 2010 with passage in the US of the Durbin Amendment, which targets debit card interchange fees. I assess the Durbin Amendment, testing the interchange fee cap it imposes against the “tourist test” proposed in the theoretical literature. I first calculate merchant incremental payment processing costs across payment instruments. While I find that debit card bank fees are higher than bank fees for other instruments, a comparison of other incremental costs softens that conclusion. With the cost estimates in hand, I then compare the interchange fee suggested by the “tourist test” with that set by the Durbin Amendment. The empirical assessment of the tourist test highlights the importance of the instrument whose costs are “avoided” – whether cash or check is used dramatically alters the test and indicates that an optimal one-size-fits-all interchange fee cap will be difficult to achieve.

Measuring Some Effects of the 2011 Debit Card Interchange Fee Reform

Measuring Some Effects of the 2011 Debit Card Interchange Fee Reform

Debit Card Interchange Fees Generally Lead to Cash-Promoting Cross-Subsidisation

Cards and cash are competing payment instruments at point-of-sale. The twosided market platform theory, based on general benefit assumptions, supports the use of multilateral interchange fees for card payments as a means of promoting the use of cards. However, analysis of the issue from the concrete processing cost viewpoint leads to the opposite conclusion: collection of debit card interchange fees by issuers results in subsidisation of cash and so actually promotes the use of cash instead of cards. Banks use card interchange revenues to cover cash distribution costs. For merchants, interchange fees increase payment costs and thus reduce the possibilities to pass through to customers the cost savings flowing from card efficiency. Moreover, because of high merchant fees due to high interchange fees, merchants are also more reluctant to accept payment cards. An MIF based on the tourist level approach will result in all parties being indifferent between cash and cards and thereby delay the realisation of the cost benefits of increased debit card usage. The resent actions of authorities to increase transparency and reduce cross-subsidisation seem to point in the right direction towards more efficient resource allocation in payments.

Debit Card Interchange Fees Generally Lead to Cash-promoting Cross-subsidisation

(2011). Debit Card Interchange Fees Generally Lead to Cash-Promoting Cross-Subsidisation. European Competition Journal: Vol. 7, No. 3, pp. 527-557.

Are Debit Cards Really More Costly for Merchants? Assessing Retailers' Costs and Benefits of Payment Instrument Acceptance

Payment cards have been a perennial source of debate among economists. That debate received additional fodder in 2011 with passage of the Durbin Amendment, which targets debit card interchange fees. I assess the claim that the merchant side of the debit card payment platform has paid more than its “fair share” for debit transactions. I find no evidence to support the view that debit cards are more costly for merchants to accept than other payment instruments, like cash or check. To the contrary, when relevant incremental costs and benefits are included, debit cards are most often one of the cheapest payment instruments for retailers to accept.

Economic Analysis of Claims in Support of the ‘Durbin Amendment’ to Regulate Debit Card Interchange Fees

Section 1075 of the 2010 Dodd-Frank Act requires the Federal Reserve Board to regulate the debit card industry including the interchange fee banks and credit unions receive from merchants. This paper reviews the arguments in support of this regulation put forward by Senator Durbin, who proposed the amendment that led to Section 1075, large retailers, and merchant trade associations. Contrary to their claims, the leading government entities that have examined interchange fees specifically reject the approach taken by the Durbin Amendment; no US antitrust authority or court has found that MasterCard or Visa have engaged in price fixing with regard to debit interchange fees; debit card interchange fees have not increased materially over time in the US; Canadians have not benefited from zero debit interchange fees in that country since they pay more for using cards, and retail banking accounts, than Americans and since Canadians cannot use their zero-interchange fee debit cards to pay online or internationally; and consumers and small businesses will not benefit from the planned reductions in interchange fees, in fact they will lose hundreds of millions of dollars a year.