Durbin Amendment Explained, And What It Means To You

October 3, 2011 | Posted in News

Remember when a debit card was just a reusable plastic check? Easy for consumers to use and cheap for retailers to process, when banks started issuing debit cards their use led to a simple equation. A dollar debited was a dollar spent, a dollar spent was a dollar made by a merchant. Banks and merchants alike saved big on processing costs, but nobody profited, per se.

The card networks thought it a shame. Retailers pay $30 billion a year in credit card processing fees, wouldn’t it be great for the networks if they could wiggle some of those fees into the debit arena? So they did. In a letter to the Federal Reserve supporting the Durbin amendment, NRF Sr. VP and General Counsel Mallory Duncan explained it best:

“Just as PIN debit was beginning to blossom, one or more of the networks essentially decided that if they could a) convince their member banks to issue debit cards (accessed with a signature rather than a PIN) that were virtually indistinguishable from ubiquitous credit cards; b) convince consumers to not to tell merchants that the new cards were debit cards; c) convince them as well to forego the safer PIN and instead push the “credit” button (so as to route the transaction through the credit card companies’ signature-based networks) even though it actually was a debit transaction; that the networks could use their “Honor All Cards” rules to force merchants to accept the transactions as if they were governed by the credit card contracts. The pay-off for the banks was that the merchant was forced by the card company rules to pay a high credit card interchange fee for what previously had been an at-par plastic check transaction. Since this was not transparent (cards generally were not marked as “debit”) merchants only learned long after the fact, if then, that they had been charged high credit card fees for debit transactions.”

As a result, debit transactions that bore nary a cost to anyone grew to a $20 billion revenue stream for the card networks, biting into retailers’ profitability, raising the cost of consumer goods, and in many cases causing small merchants to shun card payments altogether.

Then the federal government — more specifically Senator Dick Durbin — stepped in.

Durbin proposed an amendment to the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, seeking to cap debit card interchange fees charged by banks and giving the Federal Reserve authority to regulate those fees. The Fed decided the maximum interchange fee card issuers can receive from any debit card transaction is 21 cents, plus 5 basis points multiplied by the amount of the transaction. The Fed ruling also allows issuers to raise interchange fees by a penny if they incorporate fraud-prevention measures. That all equates to a cap of about 24 cents for the average $38 debit transaction. The Amendment went into effect the day before yesterday.

Of course, the banks wanted a higher cap and merchants wanted a lower one. The estimated chunk of transaction fees this will remove from the card networks’ coffers is about $9.4 billion. While this represents a victory for retailers, the bill also introduces complexity to the equation. As a result, merchants have a new responsibility: vigilance.

Rob Seward, product line manager at ACI Worldwide, puts it this way:

“Merchants must now ensure that consumers see the benefits — or at the very least, are not exposed to increased transaction costs — while keeping their own profits intact. This is a delicate balancing act, since the profitability model risks faced by all component parts of the payment ecosystem is also radically altered and may be passed on to merchants themselves. The starting point must be gaining a full picture of the payment mix today: payment types used, number of debit transactions, proportion of PIN debit and signature debit cards, networks used to route transactions, and their real — not average — values. Armed with this level of knowledge, merchants can track where they are now and develop the strategies need to realize the benefits.”

Perhaps the most promising news for retailers is the exemption on reloadable, reusable prepaid cards such as stored value and gift cards. As a result, Seward expects the already healthy stored value card market to grow, as retailers can market and leverage stored value strategically to compete with banks. “By going beyond simple store cards and creating a limited or closed payment card network, merchants can offer a valuable transaction service that is exempt from the Durbin cap, and allows them to enter into the potentially lucrative financial services space,” says Seward.

Adding to the drama was an announcement by Bank of America on Friday (9/30) that might be telling of big banks’ intentions to recoup the cash they’ll lose, and it’s not good news for consumers. Bank Of America announced that it will begin charging consumers a $5 per month fee to use debit cards. Chase and Wells Fargo are testing similar fees in select markets. Durbin decried the move, and a recent Associated Press-GfK poll of consumers found that 66% would choose another payment method if a $5 monthly debit usage fee were imposed by their bank.

www.retailsolutionsonline.com By Matt Pillar


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