The Durbin Amendment - Effective or Counterproductive?

Late in 2011, the so called Durbin Amendment became a belated addition to the Dodd-Frank Wall Street Reform and Consumer Protection Act. Its mandate: to regulate and limit the interchange fees that banks and payment networks charge merchants. Interchange fees, also known as swipe fees, are charges applied when goods and services are purchased by consumers using both debit and credit cards. Merchants loathe these fees as they cost them approximately 1% to 3% of total purchases, totaling $50 billion a year. Ostensibly the revenue generated is used to fund the various payment networks’ technology systems and to provide fraud and risk mitigation. Despite the cost associated with these endeavors having come down over time, the level of interchange fees has not. Retailers focused their argument on this fact and posited that a reduction in fees would lead to savings for consumers which would then assist in driving economic growth. Senator Dick Durbin, an Illinois Democrat, took up the merchant’s cause, and pushed the provision that placed a cap upon the interchange fee per transaction allowed. The amendment only addressed the interchange fees associated with debit cards, however, leaving the existent interchange fees on credit cards in place. Given that credit card swipe fees represent approximately half the $3 trillion a year in purchase volume, this omission was puzzling. Another facet of the law that has proven problematic is the exemption to smaller banks, those with assets of less than $10 billion, from having to comply with the debit card interchange fee cap. This has led to a two tiered pricing system as large banks have seen their average fee decreased by over 50%, while smaller banks’ interchange fees have remained at the same levels they occupied prior to the enactment of the Dodd-Frank legislation.

The fight over the passage of the law was highly contentious; debate over its impact has been equally adversarial. With the average fee now at 24 cents per transaction for large financial institutions, down from the previous 43 cent level, banks have rolled back perks and imposed new fees to make up for the lost revenue. Large banks continue to be livid over the legislation and have issued a steady stream of dire warnings predicting disaster for the financial services industry and castigating the retailers who pushed for the law. Of particular concern is the small bank exemption, which the American Banker’s Association (ABA) claims is both unfair and unsustainable. "The Durbin Amendment’s primary beneficiaries continue to be big-box retailers who want to reap the benefits of our nation's payments system without paying for it or passing along their savings to customers as promised," said Frank Keating, president of the ABA. “[the] ABA firmly believes the Durbin Amendment’s small-bank exemption can’t work long-term." Bill Cheney, president and CEO of the Credit Union National Association, echoed his colleagues’ unease, saying "Credit unions continue to be concerned that market forces will ultimately drive down the fees that the exemption for smaller institutions is intended to protect.” Both men appear to have cogent points. Retailers, unburdened by any aspect of the Durbin Amendment requiring them to pass along savings to customers, have, predictably, pocketed the savings instead. The purported primary benefit of the law, consumer savings and economic stimulus, has thus failed to materialize. Additionally, with the small banks’ swipe fees nearly double that of the larger banks, the smaller institutions run the risk of having retailers refuse to take their debit card or having to reduce their interchange fees to match those of their more sizable competitors. The loss of the interchange fee revenue for the large banks is more of an irritant than a major imposition, but for the smaller banks the revenue is sorely needed, particularly in these trying economic times. The law, intended to help the smaller banks, appears to have placed them in an untenable position instead.

So, in lieu of the predicted savings, what should consumers expect instead from this legislation? It is, at best, a mixed bag. Lower prices remain a possibility, but far from a certainty. Higher banking costs have already been put into place in the form of new fees on checking accounts and the termination of debit reward programs. Additional efforts, like surcharges on debit card holders who don’t maintain minimum balances, can be expected. One potential positive that consumers sufficiently well positioned should remain prepared to take advantage of is the push by banks towards other products, such as low interest credit cards with highly attractive bonus reward plans, all in an effort to incentivize a move away from debit cards given their increasingly lower revenue producing profile. To date this would seem to represent the only discernible advantage to the American consumers who were the intended beneficiaries of Mr. Durbin’s laudable but deeply flawed effort. Regulating only debit cards, and not credit cards, leaves the door open for some customers to save money; those who cannot take advantage of this opportunity, mainly the working poor who use debit cards more than most, will continue to suffer the loss of benefits formerly associated with their card.