LAKE FOREST, Ill—A new study shows that the Durbin Amendment has yet to put a big dent into FIs’ total debit interchange revenue, with banks and credit unions amassing $18 billion in interchange in 2015—the highest total ever.
But the Moebs $ervices study also shows that the Durbin rules have taken their toll on free checking—largely at banks. The report, too, confirms what many payments experts have stated in recent years, that FIs are making up for declining per-swipe debit interchange by increasing transaction volume.
The $18 billion exceeds the previous record of $17.5 billion in 2010, prior to the Dodd-Frank Act.
The Moebs Transaction Study found that as debit card interchange volume increases, the checking account becomes more profitable for financial institutions. Currently about 94% of all banks and credit unions are losing money in their checking portfolios, said Micheal Moebs, economist and CEO at Moebs $ervices.
Checking Headed To Break-Even
“However, checking accounts are moving towards break- even and in some cases are becoming profitable,” said Moebs. “This shift is due to the increase in debit interchange revenue.”
Moebs said the debit card swipe fee price fell 30% (averaging all bank and credit union transactions) when the Durbin rules went into effect on Oct. 1, 2011.
While not affected by Durbin rules, the price of credit card interchange in that same period rose 3.3%, explained Moebs.
“While interchange price differs between debit and credit, we see a growth in volume for both debit and credit cards at 37% and 19%, respectively, since the Durbin rules,” said Moebs. “Due to price restrictions on the debit card, the high growth in volume did not have that great an effect on total revenue, as seen with the credit card. We see an overall revenue growth of only 2.7% for debit, whereas credit revenue increased by 22.4%, which is attributed to the increase in price.”
The volume of debit card interchange at approximately 60 billion annual transactions is twice that of credit cards’ 29 billion.
“If the price of debit card interchange had not been restricted by the Durbin Amendment, the revenue would be comparable and almost equal to credit card interchange revenue in 2015,” said Moebs. “More important, debit card revenue by 2020 would have exceeded credit card revenue based on our study projections.”
Without the Durbin Amendment’s price restriction, higher debit card interchange revenue would have allowed financial institutions to continue offering free checking, asserted Moebs.
Transaction Types Adapt
“However, due to the cost of checking accounts, FIs are moving away from the free checking approach,” said Moebs. “Nationally FIs offering free checking have fallen about 20% since 2011 from 74% to 59.3% in 2015, with banks leading the way and credit unions doing their best to hold the line.”
Moebs added that as technology evolves, transaction types adapt, but the changes cost money—for banks and credit unions it’s lost revenue, and for consumers it’s higher fees. He noted that Millennials are leading the “modern financial service transaction revolution” with “massive” usage of debit cards and ACH – more than three times the volume of any previous generation.”
“Interchange revenue has been a factor in America’s commercial history for two centuries,” concluded Moebs. “These transactions are not processed free—they come at a cost. Efforts to restrict transactions either in price or volume have a direct effect on financial services. These restrictions add to the cost and even the elimination of services.”