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New rules on debit cards start to pinch small banks

Community banks and credit unions are reporting lower debit-card-processing revenue as a result of financial law changes, sparking concerns that they may be forced to impose new fees on customers to offset their losses.

Their experience stood in contrast to new reports published by the Federal Trade Commission and the Government Accountability Office, which suggest that a provision meant to protect small banks from debit-card law changes has indeed shielded them from any significant losses in revenue.

The provision exempted small financial institutions from reducing their card-processing fees (or “swipe fees“) but capped them for large banks.

Regulators said the change prompted credit-card companies to create a two-tiered pricing system in which small banks can continue charging customers higher rates each time they use their debit cards.

But community bank and credit union executives say the government reports are premature and don’t necessarily reflect the effect on their businesses.

“The fees that the credit card processors pass on as revenue to banks like ours have definitely gotten smaller,” said Denise Stokes, senior vice president of Sandy Spring Bank in Olney, Md.

“Those companies took a hit when revenue dropped for the large banks, so they passed some of that loss on to us in the form of lower rates on processing fees. Our loss hasn’t been huge, not as high as what the large banks have been hit with, but still, it’s been significant.”

Washington-area banking executives said they expect the decline to continue in coming years, which could prompt community banks and credit unions to follow in the path of many of their larger counterparts, adopting new fees and pulling back on free services to make up for lost revenue.

“When these banks start losing revenue, consumers often start losing free checking and start paying new processing fees,” said Trish Wexler, a spokeswoman for the Electronic Payments Coalition, a Washington group representing credit unions, community banks and payment-card networks.

“In the end, when two large industries fight and go to lawmakers to try to resolve those differences, it’s almost always the consumer who winds up with the short end of the stick.”

In addition to capping swipe fees for large financial institutions, which took effect in October 2011, an amendment to the Wall Street law changes also included what’s called the “routing and exclusivity” provision requiring credit-card issuers to give merchants’ banks more payment-processing options.

The intent is to drive down transaction costs for merchants as more processing companies vie to offer the most affordable services.

But some economists expect the provision will lead card companies to offer lower compensation for each transaction.

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