The Dirt On Durbin

By Matt Pillar, editor in chief

Since I last wrote about the Durbin Amendment in the month Dodd-Frank went into effect, the sky almost fell. Just as opponents of the measure predicted, banks collectively lashed back in spite, attempting to levy card usage fees on consumers to make up the anticipated $9 billion+ shortfall they’d suffer at the loss of discretionary transaction fees run rampant.

Then, in a display of populist might, consumers rallied a backlash of their own. Banks retreated, and so far, the end of days for free checking that so many predicted as a result of the Durbin measure hasn’t come to fruition. Crisis averted. But is another crisis brewing?

Early reports on the impact of the Durbin Amendment from the merchant field are mixed. On May 1, the Federal Reserve Board released the findings of a study that indicates the Durbin Amendment has accomplished its goal of cutting the average debit card interchange fee paid by acquirers to card issuers almost in half, from 43 cents to 23 cents. 

The Fed report is supported by independent research from payments powerhouse Litle & Co. In a survey of its card-not-present merchants, Litle found that the interchange rate charged on Visa and MasterCard debit cards has been cut by around 50% since the law went into effect. Including credit card transactions in the calculation brought the overall interchange fee decrease down to 19%. You can read more about this study in this new blog post from Trevor Bass, who runs the BI and data science efforts for Litle.

Now for the bad news. Small ticket item merchants (think movie rentals and coffee shops) have actually seen an increase in interchange fees as a result of the Amendment. This is because the interchange fee levied on a single transaction is calculated using a percent of the ticket price and a flat, per transaction fee. While the Durbin Amendment restricts banks to a lower interchange percent rate (0.05%) than what they could charge previously, the $0.22 to $0.23 flat fee per transaction is actually more than what was previously allowed. Given the rapidly increasing use of debit and credit cards for even small purchases, many merchants of small ticket items are not at all happy. In a brief supporting a recent lawsuit presented to the Fed on behalf of a coalition of merchant groups, Durbin himself acknowledged the bill’s shortcomings, saying the present regulation “does not reflect Congress’s intent in enacting a law whose purpose was to make sure that debit-card ‘swipe fees’ are reasonable and proportional to the cost of processing debit transactions.”

My opinion on interchange fee relief hasn’t changed. Retailers that choose to accept electronic payments should indeed have to pay the bank for the service that enables them, because that service is offered at a cost to the bank. Retailers in turn benefit from a potentially larger customer base, less cash handling risk and expense, protection from bad payment, and more. However, I also believe that interchange fees require some form of regulation to protect retailers of all sizes and stripes from gouging and greed. What do you believe? Should the banks have been left alone? Is the overall reduction in interchange fees good progress? Or did the Durbin amendment do nothing more than pass a buck made by the big banks to a buck saved by the big retailers?