Interchange Fees Forum

Lauren Tara LaCapra

NEW YORK (TheStreet) — It may be surprising to learn that while big banks brace for the impact of a rule limiting fees on debit-card purchases, the companies that process those transactions aren’t worried much at all.

The so-called Durbin amendment is targeting the fees banks charge merchants for accepting those payments. The change stands to clothesline profits at large consumer banks by $4.5 billion to $5 billion a year, according to an S&P report. Bank of America(BAC) alone has outlined a $22 billion goodwill writedown and $5 billion in lost revenue per year, while another smaller lender, TCF Financial(TCB) is suing the federal government to prevent the law from being implemented.

But card processors like American Express(AXP), Visa(V), MasterCard(MA) and Discover Financial Services(DFS) stand to face less of an impact because their “network” fees aren’t targeted by the reform measure. In fact, they’re protected by a clause inserted after heavy lobbying.

The clause prohibits the use of a network fee to “directly or indirectly compensate an issuer” or from being used to “circumvent or evade” the Fed’s rules. However, there’s likely to be some push and pull between card processors and the lenders they serve.

“We point to this language to argue that issuers cannot force networks to cut their network fee and reap the economics of that reduction,” FBR analysts said in a recent report. “Despite this language, we believe that sentiment remains that should issuers have a significant drop in their debit card interchange fee income, they will force a reduction in the network fee that Visa and MasterCard receive.”

The biggest impact of the Durbin rule – named after Sen. Richard Durbin (D., Ill.) – is expected to be a major overhaul of big banks’ business models. Consumers are widely expected to receive fewer rewards for cards and banks are likely to implement new fees outside the Durbin restrictions. Banks may begin charging for deposit accounts, for instance, or for using a debit card at all. There is also a chance of charging higher fees on cards for corporations and small businesses or those with special features.

But, as Edward Gilligan, vice chairman of American Express said in October, “someone can come in and swipe a card and the merchant knows that one Visa card costs more than another…It seems really hard to understand how a merchant is going to operationalize all of this, with a customer standing at a cash register trying to do a transaction.”

It’s unclear how the Fed will treat different types of debit-card purchases, which carry different fees. Right now, debit-card transactions authorized by a PIN code cost merchants far less than those authorized as though they’re credit-card transactions, with a signature.

The least profitable transactions for banks are likely to become the most costly for consumers – who will, in turn, change their banking and buying habits.

For instance, debit cards became a big issue for merchants because their immense popularity has led to higher operating expenses. Consumers have relied on debit even more as they deleverage in the post-crisis era. But if using a credit card carries fewer fees than a debit card, they may switch back to that kind of plastic.

As far as processors are concerned, though, whether customers use Visa debit or Visa credit doesn’t much matter.

“Regardless of the outcome, we still believe the secular shift to electronic forms of payments will continue,” says MasterCard CEO Ajay Banga, “and that fundamentally U.S. consumers are not going to go back to cash and check as a result of the Durbin amendment.”

The card-processor contingent has been providing input to the Federal Reserve, which is hammering out specifics of the regulation. The Durbin amendment requires the Fed to outline a final rule by April 21 and implement it by the third quarter of 2011.