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By Nathan Peck | MiBiz
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MICHIGAN — A piece of the Dodd-Frank financial reform legislation targeted at the largest banks in the country may end up catching smaller banks in the crossfire.

Inside the financial regulation legislation is a requirement that the Federal Reserve Board limit how much banks may charge for processing debit-card transactions. The average fee now is 44 cents per transaction, and the Fed has proposed a limit of 12 cents, beginning July 21. The American Bankers Association had come out in stark opposition to the fees, a source of some $20 billion in revenue, and it supported efforts to delay the implementation of the bill, an effort that failed in mid-June in the Senate.

Banks object to the government stepping in and taking the rare step of setting a price cap on banking services and giving price relief directly to retailers. The legislation imposes the cap on banks with assets greater than $10 billion.

Art Johnson, chairman of United Bank, said that the 12-cent fee doesn’t take into account provisions for fraud and security costs and misses the much larger fees that credit card companies charge for interchange fees.

“The debit card is very convenient and has been a relatively low-cost form of payment,” Johnson said. “It is one of the cheapest transactions, considerably cheaper than checks and credit cards. It has been viewed quite universally as fast and convenient by banks and retailers. But the infrastructure to support this instantaneous payment methodology was built and supported by banks.”

Johnson expects that smaller banks will be forced to drop their prices to the 12-cent rate as well and make up the lost revenue elsewhere in their business.

“We haven’t decided what our reaction will be to this. We don’t want to speculate on what our response is. We have delayed the decisions on the pricing of our products at this point,” Johnson said. “There is some cause to believe that costs on some banking products will go up as a result. This was a revenue stream that was not insignificant for banks of all sizes. I don’t think we’ll be able to replace all of it, but I believe that banks will make some changes in pricing decisions to replace some of it.”

Johnson points to Australia, where similar legislation capping interchange fees at 12 cents passed in 2008. Studies into the cap’s effects failed to show that the savings on the part of retailers were ever passed back to the consumer.

“One of the arguments that has been pretty well debunked is that this will actually save consumers money. I could see that (retailers’) income would go up, (but) that doesn’t sound like a consumer. It sounds like a transfer payment from banks to retailers,” Johnson said. “I don’t know of any instance where the U.S. Congress has taken a look at a product, taken a revenue flow from one business group and given it to another business group. That should be a very scary prospect for everyone.”

Michigan retailers, for their part, are unsure of the impact to their businesses, said Tom Scott, VP of Communications for the Michigan Retailers Association.

“We expect that it is going to be positive for retailers,” Scott told MiBiz. “I don’t think the outcome of this is clear. There are a number of things still in flux. At this point, it is going to depend on their banks and their processor, how the big banks react, and how the smaller banks react. There is the possibility that they could react quite differently to this. It is obscure at the time. Now that you have government involved in a pricing decision, no one is quite sure where that is going to lead.”

While still uncertain, Johnson is preaching a wait-and-see approach.

“I am concerned when you start tinkering with the free market and setting a price for a product. Once you begin to tinker, it becomes very difficult to determine what impact further tinkering will have,” Scott said. “That is part of the reason why we have to take a bit of a wait-and-see attitude. I don’t know if that provision will work at the beginning, or later on.”

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TAGS:

• art johnson
• debit card fees
• dodd-frank
• federal reserve board
• finance
• michigan
• michigan retailers association
• tom scott
• united bank