This past October marked the 10th anniversary of the enactment of the Durbin Amendment, which placed a cap on interchange fees for debit card payments processed by banks with assets over $10 billion. The amendment lowered debit fees from an average of $0.44 per transaction to a maximum of $0.21 + 0.05% of transaction, plus an additional $0.01 for anti-fraud protection. It also prohibited issuers and payment card networks from restricting to one network the number of payment card networks over which an electronic debit transaction may be processed. Issuers and networks were prevented from inhibiting the ability of a merchant to direct the routing of an electronic debit transaction to any network that may process the transaction as well.
Implemented as Regulation II by the Federal Reserve, the amendment is part of the larger Dodd–Frank Wall Street Reform and Consumer Protection Act. The motivation behind the amendment was to strengthen consumer welfare in the aftermath of the 2008 financial crisis by helping merchants save money on debit card transaction fees. The idea was that merchants would then pass on the savings to their customers by reducing prices.
However, the change came at great expense to the major banks, which supposedly lost between $6.5 billion and $14 billion per year in revenue due to the legislation.
The large banks reacted quickly to the loss in debit interchange fee revenue. For starters, they cut back on debit card rewards programs and added more rewards to credit cards, which weren’t covered by the Durbin Amendment. Then, they raised the bar on monthly account balances for free accounts and started charging consumers almost double the amount for checking accounts.
According to the Fed paper mentioned in the previous link, within two years of the Durbin Amendment’s enactment, banks had already recouped about a third of lost swipe fee revenue.
A University of Pennsylvania study found that the markets where consumers benefited somewhat from the Durbin Amendment were those where merchants faced much competition and debit card usage was high. In these market segments, merchants pushed through some of the savings from lower swipe fees to their customers.
Unfortunately, many merchants in less competitive markets opted to keep the savings to themselves. In addition, sometimes merchants didn’t process enough debit card transactions to amass significant savings to justify price reductions. This is because the Durbin Amendment actually led to higher swipe fees on small transactions by introducing a lower percentage component but higher flat transaction fee. As a result, the effective interchange rate for merchants that sold low-ticket items rose significantly.
Retailers who saw an increase in costs, hiked their prices for consumers, defeating the intended purpose of the Durbin Amendment. Many retailers who did not experience higher interchange fees as a result of the amendment even used the opportunity presented by the change to raise prices.
In short, the Durbin Amendment appears to have been an ineffective way to boost consumer welfare, although it did help out some merchants.
In Congressional hearings in 2021, Senator Dick Durbin took a shot at Visa and Mastercard, which he dubbed a duopoly, and their credit card interchange rates. The senator and political allies are trying to expand Durbin Amendment restrictions to credit cards. As with the fight over debit cards, the banks and credit unions are opposed, while merchants are generally in favor.Â
Expect much ink to be spilled in the financial and industry press until one side or the other wins.
