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Introduction Summary Results Data Testing Concluding Remarks
Bank Profitability andDebit Card Interchange Regulation:
Bank Responses to the Durbin Amendment
Cindy M. Vojtech*joint with
Benjamin Kay** and Mark D. Manuszak*
* Federal Reserve Board**Treasury, Office of Financial Research
April 4, 2014The views and opinions expressed in this paper are solely the
responsibility of the authors and should not be interpreted as reflectingofficial policy of the Treasury Dept. nor of the Federal Reserve System.
Kay, Manuszak, & Vojtech (FRB and UST) Durbin Amend.–Debit Card Interchange 4/4/2014 1 / 14
Introduction Summary Results Data Testing Concluding Remarks
Introduction—Durbin Amendment Background
Durbin Amendment of Dodd–Frank instructed the Board to1 Establish “standards for assessing” whether any interchange fee for a
debit card transaction is “reasonable and proportional to the costincurred by the issuer with respect to the transaction.”
2 Prohibit network exclusivity arrangements for debit cards and routingrestrictions on merchants.
This paper analyzes some effects of Regulation II (“Reg II”)implementing 1.
Identification is possible becauseI Law created a somewhat arbitrary size cut-off for exemption: $10 B in
consolidated assets.I Little to no incentive to adopt early or change behavior in anticipation
of the regulation.
Timeline
Kay, Manuszak, & Vojtech (FRB and UST) Durbin Amend.–Debit Card Interchange 4/4/2014 2 / 14
Introduction Summary Results Data Testing Concluding Remarks
Effect on Debit Card Interchange Fees for Treated Firms
$32 billion interchange fees collected by banks in 2009. Debit cardsalone estimated at $16 billion (Board 2011).
Before the law, the interchange fee was on average $0.44 for anaverage $38.00 transaction
After the law was in effect (2011 Q4), for a treated firm (>$10B),that $38.00 transaction provides a $0.24 interchange fee
I 21 cents/transaction + 5 bps + 1 cent fraud-prevention adjustmentI 45% fall in interchange fee
Transaction
Kay, Manuszak, & Vojtech (FRB and UST) Durbin Amend.–Debit Card Interchange 4/4/2014 3 / 14
Introduction Summary Results Data Testing Concluding Remarks
Summary of Potential Outcomes of Reg II
Outcomes Examples AddressedPrice increases on related finan-cial services
* Charge account maintenance fees forchecking accounts
In scope
* Establish higher minimum balances* Reduce account interest rates* Eliminate reward programs
Bank profitability harmed * Reduce noninterest income In scopeReduced quality of related finan-cial services
* Close bank branches In scope
Customers shifting to alternativeproducts
* Move debit card customers to creditcards
Not in scope
Pass-through of reduced inter-change fees
* Lower prices for consumer goods Not in scope
Merchant profitability helped * Lower costs for merchant expenses Not in scope
Kay, Manuszak, & Vojtech (FRB and UST) Durbin Amend.–Debit Card Interchange 4/4/2014 4 / 14
Introduction Summary Results Data Testing Concluding Remarks
Testing Strategy & Summary Results
Difference-in-differences: Exploit law’s $10 B thresholdI First difference: Change over time for treated and not-treated banksI Second difference: Differential change between treated and not-treated
banks following Reg II’s effective dateI Advantages and disadvantages of diffs-in-diffs approach
Summary resultsI Interchange income falls: Treated banks did not disproportionately
increase debit card volumes or switch customers to credit cardsInterchange income graph
I Deposit fees increase: Evidence of partial mitigation by treated banksDeposit fee levels graph Deposit fee growth graph
I Broader income measures fall: Consistent with incomplete mitigationby treated banks
I No significant evidence of lowered quality: Lowering expenses,decreasing operations, or changing size to avoid treatment
Kay, Manuszak, & Vojtech (FRB and UST) Durbin Amend.–Debit Card Interchange 4/4/2014 5 / 14
Introduction Summary Results Data Testing Concluding Remarks
Data
“Bank” data: Bank holding company (FR Y-9C) and commercialbank (Call Report)
I Regulatory financial statements filed quarterlyI For BHCs with >$500 million in assets, standalone banks from Call
Report restricted to >$500 million
Exemption status: Based on commercial bank lists published by theBoard in 2011, 2012, and 2013 aggregated to BHC level
Regressions on two families of panels1 Consistent Panel—688 firms; for all nine primary variables, a
year-over-year log difference can be calculated for at least four quartersbetween 2011 and 2012.
2 [Variable Name] Panel—firms that report given variable such that ayear-over-year log difference can be calculated for at least four quartersbetween 2011 and 2012.
F Panels range in size 700–1,047 firms
Kay, Manuszak, & Vojtech (FRB and UST) Durbin Amend.–Debit Card Interchange 4/4/2014 6 / 14
Introduction Summary Results Data Testing Concluding Remarks
Table of Means—Consistent Panel
Levels (000) Log Differences
Not-Treated Firms Treated Firms(407 Firms) (47 Firms) Not-Treated Treated Difference-
Pre-Law Post-Law Pre-Law Post-Law Firms Firms In-Difference
2010:Q4 2011:Q4 2010:Q4 2011:Q4 2011:Q4 2011:Q41 2 3 4 5 6 7
Interchange Income 629 681 115,131 91,717 0.126 -0.261 -0.387(1,277) (1,307) (302,461) (238,621) (0.390) (0.496)
Deposit Fees 1,535 1,503 119,741 126,249 -0.043 0.018 0.061(3,695) (3,712) (279,819) (297,238) (0.191) (0.153)
Core Other Noninterest 984 1,065 141,271 117,339 0.085 -0.121 -0.205Income (1,677) (1,631) (345,791) (283,689) (0.299) (0.430)
Core Total Noninterest 3,870 3,850 693,809 591,803 -0.001 -0.072 -0.071Income (6,551) (6,476) (2,023,087) (1,692,371) (0.214) (0.192)
Core Revenue 17,581 17,908 1,916,518 1,806,469 0.014 0.037 0.023(18,344) (18,793) (4,926,321) (4,420,012) (0.094) (0.190)
Standard deviations are in parentheses.Limited to panel members with all primary variables in 2010:Q4 and 2011:Q4.
Kay, Manuszak, & Vojtech (FRB and UST) Durbin Amend.–Debit Card Interchange 4/4/2014 7 / 14
Introduction Summary Results Data Testing Concluding Remarks
Testing Equation
Difference-in-differences methodology
∆yi ,t = [gi ] + λt + τ · ∆Treati ,t + ∆ui ,t ,
where
∆yi ,t = (ln yit − ln yit−4)
λt is a common date-specific effect
∆Treati ,t = 1 if firm i is subject to the regulation at time t and notin t − 4 (an interaction of treated time with treated firm)
∆ui ,t is the error term
τ is the effect of the policy on a firm
gi is a firm-specific growth trend (making it a fixed effect estimate)
Kay, Manuszak, & Vojtech (FRB and UST) Durbin Amend.–Debit Card Interchange 4/4/2014 8 / 14
Introduction Summary Results Data Testing Concluding Remarks
Interchange Income
Consistent Interchange Inc. Consistent Interchange Inc.Variables 1 2 3 4
Durbin×Treat -0.412*** -0.420*** -0.405*** -0.409***(0.0492) (0.0541) (0.0490) (0.0508)
Constant 0.142*** 0.141*** 0.149*** 0.149***(0.0274) (0.0272) (0.0264) (0.0263)
Fixed Effects? No No Yes Yes
Observations 10,169 10,330 10,169 10,330Firms 688 700 688 700R-squared 0.023 0.024 0.215 0.218Adj. R-squared 0.021 0.023 0.157 0.160
Robust standard errors in parentheses are clustered at the firm level.Year-quarter dummies are suppressed.*** p<0.01, ** p<0.05, * p<0.10
Relative sizes
Kay, Manuszak, & Vojtech (FRB and UST) Durbin Amend.–Debit Card Interchange 4/4/2014 9 / 14
Introduction Summary Results Data Testing Concluding Remarks
Deposit Fees
Consistent Deposit Fees Consistent Deposit FeesVariables 1 2 3 4
Durbin×Treat 0.0401** 0.0334* 0.0262 0.0469*(0.0177) (0.0198) (0.0192) (0.0253)
Constant -0.00156 0.00102 0.00278 0.00825(0.00800) (0.00879) (0.00767) (0.00884)
Fixed Effects? No No Yes Yes
Observations 11,425 16,630 11,425 16,630Firms 688 1,019 688 1,019R-squared 0.028 0.017 0.245 0.229Adj. R-squared 0.027 0.016 0.195 0.178
Robust standard errors in parentheses are clustered at the firm level.Year-quarter dummies are suppressed.*** p<0.01, ** p<0.05, * p<0.10
Relative sizes
Kay, Manuszak, & Vojtech (FRB and UST) Durbin Amend.–Debit Card Interchange 4/4/2014 10 / 14
Introduction Summary Results Data Testing Concluding Remarks
Broader Measures of Income—Core Income
Core Other Core Total CoreNoninterest Income Noninterest Income Revenue
Core Other Core Total CoreConsistent Nonint Inc Consistent Nonint Inc Consistent Revenue
Variables 1 2 3 4 5 6
Durbin×Treat -0.240*** -0.245*** -0.0722*** -0.0646*** -0.00268 -0.0127(0.0407) (0.0432) (0.0207) (0.0193) (0.0175) (0.0150)
Constant 0.167*** 0.137*** 0.0160 0.00880 0.0301*** 0.0247***(0.0217) (0.0197) (0.0113) (0.0104) (0.00659) (0.00690)
Observations 11,100 15,225 11,400 16,928 11,435 17,060Firms 688 976 688 1,043 688 1,047R-squared 0.021 0.011 0.007 0.004 0.012 0.012Adj. R-squared 0.019 0.010 0.005 0.003 0.011 0.011
Robust standard errors in parentheses are clustered at the firm level.Year-quarter dummies are suppressed.*** p<0.01, ** p<0.05, * p<0.10
Relative sizes
Kay, Manuszak, & Vojtech (FRB and UST) Durbin Amend.–Debit Card Interchange 4/4/2014 11 / 14
Introduction Summary Results Data Testing Concluding Remarks
Robustness Testing
We perform a number of related tests and robustness checks includingtesting
Firms with asset sizes closer to $10 B threshold Figure
For selection into treatment—balance sheet reaction Table
Expense reductions such as salaries and premises Table
For operational changes—number of branches and FTEs Table
For loss of customers—number of deposit accounts Table
For reporting issues—use annual income (year-to-date) Table
Alternative measures of interchange income and noninterest income
Kay, Manuszak, & Vojtech (FRB and UST) Durbin Amend.–Debit Card Interchange 4/4/2014 12 / 14
Introduction Summary Results Data Testing Concluding Remarks
Concluding Remarks
Bank managers predicted being able to mitigate 30-50% of revenueloss
I Often described as a multi-product approach
We have a multi-pronged mitigation approach that wouldinclude such actions as reducing the cost associated withdebt card offers, changes and eliminations to rewards,selected fees, incorporation of debit usage in the bundleddeposit product offerings, and the implementation of newproducts. We are consulting with our customers about theirpreferences for our services and how they pay for thoseservices.
—Fifth Third CFO
I Implementation was likely mixed across banks but no general evidenceof cutting costs
Source of quote: FactSet CallStreet through SNL Financial. The conference call was on January 20, 2012.
Kay, Manuszak, & Vojtech (FRB and UST) Durbin Amend.–Debit Card Interchange 4/4/2014 13 / 14
Introduction Summary Results Data Testing Concluding Remarks
Concluding Remarks
Treated banks experienced a loss of income following implementationof Reg II
I Interchange income fallsI Mitigation from deposit fees offsets roughly 30 percent of income loss
—suggests that large banks have pricing powerI Results are robust with sub-samples around $10 B thresholdI No evidence of banks changing size to avoid treatment
Kay, Manuszak, & Vojtech (FRB and UST) Durbin Amend.–Debit Card Interchange 4/4/2014 14 / 14
Supplemental Information
Timeline of Dodd-Frank and Reg II Implementation
Back to Intro
Kay, Manuszak, & Vojtech (FRB and UST) Durbin Amend.–Debit Card Interchange 4/4/2014 14 / 14
Supplemental Information
Example of Debit Card Transaction
Note: Numbers are illustrative of the types of fees that would be charged in a transaction andtheir relative magnitudes.
Back to Interchange effect
Kay, Manuszak, & Vojtech (FRB and UST) Durbin Amend.–Debit Card Interchange 4/4/2014 14 / 14
Supplemental Information
Interchange Fees: Notable Features
Set by payment card network
Do not vary by issuer
Typically ad valorem + fixed component, sometimes with a cap
Vary by merchant type (large retailer vs. market vs. gas station)
Transaction fee rate comparisons historicallyI credit card > debitI signature debit > PIN debit
Pre-Reg II examplesI Visa signature, standard debit: 1.90% + $0.25I MasterCard signature, standard debit: 1.90% + $0.25I Vis PIN, qualitifed supermarket, performance threshold I: $0.20I NYCE PIN, standard debit: 0.75% + $0.15I STAR PIN, standard debit: 0.75% + $0.16 ($0.66 cap)
Back to Interchange effect
Kay, Manuszak, & Vojtech (FRB and UST) Durbin Amend.–Debit Card Interchange 4/4/2014 14 / 14
Supplemental Information
Interchange Income for Consistent Panel
Source: FR Y-9C and Call Report (09:Q1-13:Q2).The Consistent Panel includes the 688 firms that report required values for all nine primaryincome and expense variables. For each variable, a year-over-year log difference (growth rate)can be calculated for at least four quarters between 2011 and 2012.
Back to Summary results
Kay, Manuszak, & Vojtech (FRB and UST) Durbin Amend.–Debit Card Interchange 4/4/2014 14 / 14
Supplemental Information
Deposit Fees for Consistent Panel
Source: FR Y-9C and Call Report (09:Q1-13:Q2).The Consistent Panel includes the 688 firms that report required values for all nine primaryincome and expense variables. For each variable, a year-over-year log difference (growth rate)can be calculated for at least four quarters between 2011 and 2012.
Back to Summary results
Kay, Manuszak, & Vojtech (FRB and UST) Durbin Amend.–Debit Card Interchange 4/4/2014 14 / 14
Supplemental Information
Deposit Fee Growth for Consistent Panel
Source: FR Y-9C and Call Report (09:Q1-13:Q2).The Consistent Panel includes the 688 firms that report required values for all nine primaryincome and expense variables. For each variable, a year-over-year log difference (growth rate)can be calculated for at least four quarters between 2011 and 2012.
Back to Summary results
Kay, Manuszak, & Vojtech (FRB and UST) Durbin Amend.–Debit Card Interchange 4/4/2014 14 / 14
Supplemental Information
Relationship Between Income Items
Consistent Panel (2010)
Deposit Fees as a % of: Interchange as a % of: Interchange as a % of:Core Total Core Core Other Core Total Core Other Total
Interchange Nonint Inc Revenue Nonint Inc Nonint Inc Revenue Nonint Inc Nonint Inc Revenue
Treated FirmsMean 279 36 9 71 20 5 37 15 4St dev. (234) (15) (4) (21) (15) (4) (35) (12) (3)
Not-Treated FirmsMean 733 46 8 58 16 3 36 15 3St dev. (2,513) (48) (6) (62) (11) (3) (23) (29) (3)
All FirmsMean 694 45 8 59 17 3 36 15 3St dev. (2,407) (46) (6) (59) (12) (3) (25) (28) (3)
Interchange income Deposit fees Core income
Kay, Manuszak, & Vojtech (FRB and UST) Durbin Amend.–Debit Card Interchange 4/4/2014 14 / 14
Supplemental Information
Coefficient Sensitivity to Changing Sample, Near $10 B
Back to Robustness checks
Kay, Manuszak, & Vojtech (FRB and UST) Durbin Amend.–Debit Card Interchange 4/4/2014 14 / 14
Supplemental Information
Broad Measures of Expense
Other TotalSalaries Premises Noninterest Exp Noninterest Exp
Other TotalConsistent Salaries Consistent Premises Consistent Nonint Exp Consistent Nonint Exp
Variables 1 2 3 4 5 6 7 8
Durbin×Treat 0.0168 0.00941 0.0299 0.0118 0.0417* 0.00445 0.0308* 0.0161(0.0127) (0.0102) (0.0183) (0.0153) (0.0242) (0.0244) (0.0174) (0.0155)
Constant 0.0176*** 0.0110** 0.0543*** 0.0494*** 0.178*** 0.181*** 0.0859*** 0.0841***(0.00656) (0.00520) (0.00697) (0.00603) (0.00901) (0.00823) (0.00970) (0.00785)
Observations 11,434 17,080 11,434 17,071 11,424 17,040 11,432 17,080Firms 688 1,048 688 1,048 688 1,047 688 1,048R-squared 0.013 0.011 0.008 0.004 0.098 0.074 0.017 0.016Adj. R-squared 0.012 0.010 0.006 0.003 0.097 0.073 0.015 0.015
Robust standard errors in parentheses are clustered at the firm level.Year-quarter dummies are suppressed.*** p<0.01, ** p<0.05, * p<0.10
Back to Robustness checks
Kay, Manuszak, & Vojtech (FRB and UST) Durbin Amend.–Debit Card Interchange 4/4/2014 14 / 14
Supplemental Information
Probability of Nominal Assets >$10 B at Year-End
Range of Nominal Asset Values atPrevious Year-End ($ in Billions)
<5 [5,10) [10,15) ≥15Year 1 2 3 4
2009 Prob ≥ 10B 0.000 0.083 1.000 1.000N 505 36 12 36
2010 Prob ≥ 10B 0.000 0.057 0.800 1.000N 536 35 15 37
2011 Prob ≥ 10B 0.000 0.053 0.923 1.000N 576 38 13 39
2012 Prob ≥ 10B 0.000 0.054 1.000 1.000N 574 37 13 40
Back to Robustness checks
Kay, Manuszak, & Vojtech (FRB and UST) Durbin Amend.–Debit Card Interchange 4/4/2014 14 / 14
Supplemental Information
Year-to-Date Regressions
Interchange Deposit Core Other Core Total CoreIncome Fees Noninterest Income Noninterest Income Revenue
Deposit Core Oth Core Tot CoreConsistent Interchange Consistent Fees Consistent Nonint Inc Consistent Nonint Inc Consistent Revenue
Variables 1 2 3 4 5 6 7 8 9 10
Treat×y2011 -0.185*** -0.168*** -0.0100 -0.0183 -0.111** -0.0970** -0.0568** -0.0598* -0.0155 -0.00296(0.0468) (0.0496) (0.0203) (0.0226) (0.0465) (0.0449) (0.0262) (0.0355) (0.0251) (0.0271)
Treat×y2012 -0.103*** -0.105*** 0.00865 0.00629 -0.0648*** -0.0704*** -0.0132** -0.0103** 0.00235 -0.0207(0.0139) (0.0151) (0.00542) (0.00476) (0.00991) (0.0127) (0.00554) (0.00520) (0.00340) (0.0215)
Constant 0.141*** 0.144*** 0.00524 0.00688 0.123*** 0.121*** 0.0151* 0.0248*** 0.0359*** 0.0414***(0.0204) (0.0203) (0.00747) (0.00761) (0.0153) (0.0142) (0.00915) (0.00909) (0.00515) (0.00591)
Observations 2,225 2,261 2,361 3,523 2,334 3,303 2,361 3,600 2,361 3,615Firms 616 626 616 930 616 887 616 953 616 956R-squared 0.031 0.031 0.023 0.008 0.036 0.015 0.004 0.002 0.009 0.010Adj. R-squared 0.029 0.029 0.021 0.006 0.034 0.014 0.002 0.000 0.007 0.009
Robust standard errors in parentheses are clustered at the firm level.Year dummies are suppressed.*** p<0.01, ** p<0.05, * p<0.10
Back to Robustness checks
Kay, Manuszak, & Vojtech (FRB and UST) Durbin Amend.–Debit Card Interchange 4/4/2014 14 / 14
Supplemental Information
Branch Count and FTE Regressions
Branches FTEsVariables 1 2 3 4
Durbin×Treat 0.0165 0.0114 0.0472 0.0322(0.0194) (0.0241) (0.0316) (0.0257)
Constant 0.0331*** 0.0369*** 0.0121** 0.0157***(0.00417) (0.00430) (0.00504) (0.00468)
Fixed Effects? No Yes No Yes
Observations 3,998 3,998 9,548 9,548Firms 852 852 571 571R-squared 0.004 0.286 0.009 0.312Adj. R-squared 0.003 0.092 0.007 0.267
Robust standard errors in parentheses are clustered at the firm level.Year dummies are suppressed for branch regressions, andyear-quarter dummies are suppressed for FTE regressions.*** p<0.01, ** p<0.05, * p<0.10
Back to Robustness checks
Kay, Manuszak, & Vojtech (FRB and UST) Durbin Amend.–Debit Card Interchange 4/4/2014 14 / 14
Supplemental Information
Number of Accounts Regressions
Total Small Large Total Small LargeAccounts Accounts Accounts Accounts Accounts Accounts
Variables 1 2 3 4 5 6
Durbin×Treat 0.0308* 0.0297* 0.116 0.0220 0.0224 0.0823(0.0178) (0.0179) (0.0915) (0.0252) (0.0253) (0.0793)
Constant -0.0107 -0.0110 0.0499*** -0.00959 -0.00989 0.0523***(0.00808) (0.00822) (0.0131) (0.00770) (0.00788) (0.0123)
Fixed Effects? No No No Yes Yes Yes
Observations 5,480 5,480 5,479 5,480 5,480 5,479Firms 569 569 569 569 569 569R-squared 0.002 0.002 0.019 0.269 0.267 0.414Adj. R-squared 0.000 0.000 0.017 0.183 0.181 0.345
Robust standard errors in parentheses are clustered at the firm level.Year-quarter dummies are suppressed.*** p<0.01, ** p<0.05, * p<0.10
Back to Robustness checks
Kay, Manuszak, & Vojtech (FRB and UST) Durbin Amend.–Debit Card Interchange 4/4/2014 14 / 14