Issuers Discuss Impact of Dodd-Frank Durbin Amendment

On October 1, new Federal Reserve Board guidelines went into effect to implement interchange fee reform provisions of Dodd-Frank Act Section 1075 (the Durbin Amendment).  As a result, banks with holdings of $10 billion or more now have a rate cap on what they can charge merchants for processing debit card transactions (21 cents plus 0.05% of the transaction, compared to the current average of 44 cents per transaction).  Affected companies have been striving to project the impact of the new rules on their business in SEC filings.

USA Technologies, Inc. (NASDAQ: USAT), which has a 19 year history in the small ticket electronic payments industry and the unattended Point of Sale market, has been notified by its U.S. credit and debit card processor that Visa and MasterCard will significantly raise their interchange fees for small ticket category transactions paid for through debit cards issued by regulated banks as defined under the Durbin Amendment.  In its Form 10-K filed 9/27/11, USAT states the interchange rate would increase on October 1 from 1.55% of a transaction plus 4 cents, to 0.5% of a transaction plus 22 cents, which represents an increase of approximately 247% based on a transaction of $1.67, which was the average transaction experienced by USAT during the fiscal year ended June 30, 2011.  Approximately 82% of the transactions handled by the USAT network in FY11 consisted of small ticket debit card transactions.  Of such transactions, USAT estimates that 70% were debit transactions from regulated banks.  USAT and its card processor are currently in discussions with the card associations to analyze the impact of the rate increases and to negotiate a viable rate structure. 

The Toronto-Dominion Bank (NYSE: TD) strived to quantify the impact of the  new Federal Reserve rules in the “How Our Businesses Performed” section of its 3Q11 earnings news release filed with a Form 6-K on September 1.  "As a result of the Durbin Amendment, revenue at U.S. Personal and Commercial Banking is expected to decline by approximately US$50-60 million pre-tax per quarter, excluding mitigation strategies.  One third of that impact is expected in the fourth quarter of fiscal 2011 and the first full quarter impact is expected in the first quarter of fiscal 2012.  We are formulating plans to recover this lost revenue over the next 2 years, but not specifically in the debit product."

In addition to the interchange fee cap, Durbin contains a provision that prevents card networks from contractually requiring that their debit cards be transacted exclusively on one debit network.  This will free merchants up to choose a network from a pool of competitors, potentially resulting in a lower per-transaction cost on their side and a further hit to interchange fee revenue on the bank’s side.  PSB Holdings Inc. (OTCBB: PSBQ) touched on this facet of the legislation in the MD&A section of Form 10-Q filed 8/15/11:  “While the new rules technically do not apply to us as a smaller bank, the impacts are expected to become uniform for the industry over time as merchants use their new authority and options to process customer card activity across a wider number of providers. While the timing is uncertain, these fully implemented changes could lower our annualized debit card interchange revenue by approximately $234, down approximately 36% from current revenue levels.”