Ever since it was a last minute addition to the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, the Durbin Amendment has been a controversial topic among lawmakers and businesses of all-sizes. With a new presidential administration in office promising to roll back any unnecessary regulations, the Durbin Amendment has once again stirred-up debate.
But, what exactly is the Durbin Amendment and why should your business care about it?
Breaking Down the Durbin Amendment
Sponsored by Illinois Democratic Senator Dick Durbin, this amendment was an extension within the Dodd-Frank Act. That act permitted the Federal Reserve to put a cap on the interchange fees charged to merchants every time they swiped a debit card. The amendment was able to lower per transaction debit interchange fees with the hope that this would spur economic growth. After all, if merchants weren’t being charged high interchange fees by card processing companies they could drop their prices, which would entice customers to spend more.
Prior to the Durbin Amendment, banks were charging retailers 44 cents per transaction. According to the Federal Reserve, these banks collected approximately $20 billion annually on interchange fees in order to cover fraud prevention and administrative costs. When the amendment went into effect in October 2011 these charges were capped at 12 cents.
There were also additional provisions in the Durbin Amendment that affected regulated and unregulated debt. As explained in a previous Due post;
“The Durbin Amendment has established two ratings for banks that are based on their assets. If the card issuing bank is regulated, also known as an exempt bank, it means that their assets equal more than $10 billion. However, if the card issuing bank is non-regulated, aka a non-exempt bank, then they have assets under $10 billion.”
This means that merchants will have to pay a different fee based on the bank that issued the debit card. For instance, the regulated debit fee is 0.05% + $0.21, while the unregulated is 1.60% + $0.05. Before the Durbin Amendment the fee was 1.190% + $0.10/.
Supporters of the Durbin Amendment, which include retail trade groups like the Merchant Payments Coalition and the Association for Convenience and Fuel Retailing, have claimed that since the amendment has lowered bank fees on debit-card transactions for businesses they’ve been able to lower prices and pass those discounts to customers.
However, critics, such as credit unions, have stated that retail prices haven’t dropped. Additionally, the Federal Reserve Bank of Richmond found that one-third of businesses actually saw their interchange fees rise. William Mayer, supervisor of Dupage Township, explains why this has occurred;
“Prior to the amendment, interchange fees were set by the competitive forces of the free market. Because the system was flexible, businesses selling low-cost items like a candy bar or morning coffee were able to receive discounts on the debit card interchange processing fee for these purchases, which allowed businesses to keep more of their profits. Unfortunately, the restrictive price controls forced the elimination of these discounts, which means our mom-and-pop shops are paying fees on par with larger stores selling big-ticket items at a much higher volume.”
Regardless if you support or oppose the Durbin Amendment, it has lowered credit card processing fees. The problem is that this has benefited more businesses than others.
Winners and Losers of the Durbin Amendment
Which merchants benefited the most with the Durbin Amendment?
In most cases that would be merchants who sell medium to big-ticket items. This is because they’ve been able to reduce their swipe fees by almost half. Before the amendment banks and card issuers would determine transaction fees on a variable percentage of the purchase value.
On the flip-side, local community banks, credit unions, and business with small transaction sizes didn’t experience these benefits. In fact, some lost revenue and actually paid more in interchange fees. As Margarette Burnette writes in NerdWallet, “instead of paying a 6-cent interchange fee for a $3.50 charge for coffee and a doughnut, a shop owner suddenly faced a fee of 22 cents for the same bill.” To recoup this loss in revenue, these businesses are not dropping prices.
In other words, prior the Durbin Amendment, smaller transaction values were charged smaller fees while larger purchases experienced larger fees. Once it went into effect, card networks like Visa and MasterCard, began charging the maximum amount on transactions – even for smaller purchases. As Harry C. Alford, cofounder and president/CEO of the National Black Chamber of Commerce, explains in Forbes;
“Before the Durbin Amendment, interchange fees were negotiable, which was a good thing for mom and pop stores. But government regulation as dictated by the Durbin Amendment has set a floor as well as a ceiling for these fees, meaning that some small retailers are paying more for these transactions now than they ever did before the law was drafted.”
Another unintended consequence is that there is less flexibility for banks and financial institutions to offer incentives like debit rewards programs and free checking for their members.
Repeal or Uphold the Durbin Amendment?
Because of the decisiveness of the Durbin Amendment, there has been a debate in Washington D.C. on whether to repeal or uphole the amendment. Here’s a rundown on the support and opposition to Durbin via Ben Dwyer of CardFellow.
On June 14, 2016, Texas Senator Randy Neugebauer introduced H.R. 5465. Senator Neugebauer stated that the Durbin Amendment “an egregious example of the federal government picking winners and losers. Simply put, it represents crony capitalism at its worst.” This was followed by introduction of H.R.5983 by Texas Congressman Jeb Hensarling September 9, 2016.
Those in favor of repealing the Durbin Amendment claim that;
- Retailers are not passing along savings from reduced debt to their customers.
- The amendment is increasing consumer banking costs because of higher charges and vanishing debit card reward programs.
- Thanks to higher checking account fees, along with higher minimum balances required to avoid bank fees, there is a growing number of “unbanked customers.”
- Community banks and credit unions are experiencing higher costs.
- There has been an increase in debit interchange cap costs for businesses with a low average sale amount.
- Larger retailers have more leverage in negotiating costs.
Groups like the Electronic Payments Coalition are also in favor of repealing Durbin.
Those wishing to uphold Durbin include groups like Electronic Payments Coalition. These groups are supported by hundreds of medium to large businesses who believe that;
- Interchange costs for businesses will rise because there won’t be any regulations to keep them in check.
- Debit network routing will return to the monopoly that it once was. This will result in the card networks price-fixing debit interchange without any competition among debit networks.
- Without Durbin, competition and innovation won’t be embraced. This is because global card networks refuse to create a more transparent, equitable, and free market.
According to Andy Ellen, President and General Counsel, NC Retail Merchants Association and Gary Harris, Executive Director, NC Petroleum and Convenience Marketers, “Now is not the time to load yet more swipe fees onto the backs of retailers because swipe fees raise prices, slow job growth at a time right now when the country desperately needs jobs, curtails economic growth and makes a mockery of our most cherished notions of the free-market system.”
However, as Dwyer concludes, “The Durbin Amendment is a good first step toward bringing interchange and the cost associated with processing bankcards out from the shadows, but a more effective approach is needed – one that interjects transparency into the industry as a whole, instead of dictating specific pricing or routing within it.”
The intention with the Durbin Amendment was to boost economic activity among consumers and small businesses. Unfortunately, the interchange fees established by the Federal Reserve have resulted in more costs than savings to both groups. Durbin has, however, provided benefits for larger businesses since they have more flexibility and leverage on the reduced interchange fees, which in turn could be passed down to their customers.
Small business owners can take advantage of Durbin finding a merchant account provider that is aware of Durbin and willing to adjust their prices, increase their transactions, or start accepting payments like bitcoin since transaction fees are minimal.
How has the Durbin Amendment impacted your business?