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.