Exactly one year ago, on October 1, 2011, the Durbin Amendment became law, sparking intense debates over whether the increased government regulation would lead to successful financial reform.
That debate continues today, and on the one-year anniversary of the law, PYMNTS.com takes a look at how consumers, financial institutions, merchants and businesses have been affected.
Market Platform Dynamics’ CEO Karen Webster spoke with a trio of MPD experts – Founder David Evans and Managing Directors Brian Smith and Gloria Colgan – to discuss how Durbin has impacted the financial industry so far, what will change headed forward, and how businesses and consumers must adapt.
Evans, who organized a group of economists in the winter of 2010 to examine potential unintended consequences of the Durbin Amendment, said that unfortunately, many of his team’s predictions have come to fruition.
“Banks, having lost a quarter or a third of the revenue they used to get form checking accounts, did what any business would do – they started looking at where they would get that money back,” Evans said. “They can take a hit on profits, and they’ve done that, but they’ve also raised fees.”
According to Evans, banks have reacted in a predictable way to the new debit and credit interchange fee cuts, which reduced the average transaction fee nearly in half, from roughly $0.44 to $0.24. The result? Consumers may be playing less in interchange fees, but they’re paying more elsewhere.
“Now we know that over the past year [banks have] increased fees on checking accounts, reduced by a considerable fraction the number of people with so-called free checking accounts, and increased surcharges on ATM transactions,” he said.
Smith, a managing director with MPD and former partner with Watkins Financial Services Practice, said the Durbin Amendment has been tough on financial services as well as consumers.
Noting the massive penalties levied upon the likes of Capital One and Discover, which resulted in hundreds of millions of dollars paid in restitutions and fees thanks to the Consumer Financial Protection Bureau (CFPB), Smith said banks must be extraordinarily careful to comply with the new regulations.
“It’s not just, ‘did you technically comply with the disclosures on your products,’ but how did the consumer react, did they understand them, did they misunderstand them, did they feel abused,” Smith said.
Likening the CFPB to an investigative bureau, Smith said he’s had industry conversations which indicate that another major financial institution will “fall under the ax of the CFPB” in the coming weeks.
While Evans and Smith believe the Durbin Amendment has hindered some facets of the financial industry, many believe it’s also led to an increase in competition and innovation among merchants and business. Glora Colgan, another managing director for MPD with considerable experience on the merchant side of the regulations, was first to bring this point of view to the debate.
“There’s a lot of competition happening from a pricing solution that new innovative players are coming up with. New competition breeds new innovative ideas, and you’re seeing that happening right now,” Colgan said.
“I’m not sure that Durbin was entirely the solution for that: there were innovative players happening before Durbin,” Colgan admitted, “But I think creative solutions always come about and adapt regardless of the environment. Whether or not the full economics are beneficial or perhaps even negative because of the intense competition that’s happening remains to be seen.”
Evans and Smith both agreed, and also noted that the financial industry is undergoing a period of remarkable innovation.
“One thing I guess I would say that makes me optimistic is there’s an extraordinary amount of innovation going on in this business now,” Evans said. “So while I happen to think that Durbin was a mistake and the CFPB, while it’s probably going to do some good things, will also do some harmful things to the industry … there’s going to be a ton of stuff going in this industry that’s going to be innovative and interesting, and life will go on.”
To hear more of Evans, Smith, Colgan and Webster on what we can expect over the next year and how the 2012 presidential election will impact the CFPB, listen to the full podcast below.
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