Connecticut bankers have been arguing against a proposed change in federal laws that would cap the swipe fees they charge retailers for accepting debit card purchases, saying it will cut deeply into their income.
But how badly will it actually hurt? Pretty bad, according to one recent estimate by Raddon Financial Group, which is the research arm of Glastonbury-based Open Solutions.
According to the recent Raddon report, in order to cover the losses from the proposed limits to interchange fees, an average $750 million financial institution would have to do one of the following:
• Eliminate 18 full-time employees, assuming $4.5 million in assets and $65,000 in salary and benefit cost per employee;
• Lower deposit rates by 16 basis-points; require a $6.08 monthly fee on checking for balances below $1,000, assuming 60 percent of accounts do not meet the minimum; or
• Impose a monthly debit card fee of $3.65.
“This could have unintended and devastating consequences on community-based institutions,” said Louis Hernandez, Jr., chairman and CEO of Open Solutions, a major provider of software and back-end technology for banks and other financial services institutions.
Hernandez, whose company’s main clientele is community lenders, recently sent a letter to FDIC chairwoman Sheila Bair urging her to delay the changes to swipe fee regulations.
“Swipe fees” are the fees banks charge retailers and restaurants for accepting debit-cards.
In the Dodd-Frank financial reform law, Sen. Dick Durbin, D-IL, added an amendment calling for the Fed to review and lower the interchange on debit cards. In December, the Fed came out with a preliminary finding capping all debit interchange at 12 cents.
The retail industry heavily favors the measure, arguing that interchange is one of their top expenses. Swipe fees range between 2-2.5 percent per transaction and are assessed on all debit and credit card transactions, although the new Federal Reserve rules apply only to debit cards.
In Connecticut, the average interchange per debit card transaction is 44 cents, according to one estimate.
The banking industry, however, vehemently opposes the measure saying it would put a huge dent in their income. And there are several bills floating around Capitol Hill that would delay swipe fee reform, giving the Fed more time to study the issue.
That was the request Hernandez made to Bair in his recent letter.
Hernandez said the proposed changes to interchange fees would result in a 20 percent to 50 percent reduction in fee income to community-based financial institutions, which equates to tens of billions of dollars.
In addition to swipe fees, other new regulations under the Dodd-Frank law would increase compliance costs for community lenders by 20 percent, Hernandez said. And all of those increased expenses will make it harder for banks to operate.
“When you start to erode fee income dramatically and raise the cost of compliance, there are much more limited resources and less access to capital,” he said. “It’s not hard to imagine the number of community based institutions could diminish dramatically.”
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TD Bank reaches out to small biz
TD Bank is embarking on an aggressive small business outreach campaign this month with the hopes of expanding its commercial banking footprint in Connecticut, and across its branch network from Maine to Florida.
The bank’s goal is to meet in-person with 25,000 small businesses across the country. That includes meetings with an estimated 1,000 small businesses throughout Connecticut and approximately 460 small companies in the Hartford, New Britain, and Waterbury region.
TD Bank, a subsidiary of the Toronto-Dominion Bank in Canada, is the fifth largest bank operator in Connecticut with more than 80 branches and $5.2 billion in deposits.
Greg Bordonaro writes the Financial Sense column every other week. Reach him at gbordonaro@HartfordBusiness.com.