The Durbin Amendment is an addendum to the Dodd-Frank Financial Reform and Consumer Protection Act passed by Congress in 2010. Its namesake, Senator Richard Durbin from Illinois, wrote the plan to expand Federal Reserve powers for setting interchange fees related to debit card transaction processing. In setting the fees, the ultimate goal is spur economic growth with lower fees. Theoretically, retailers could lower prices on consumer goods with the savings on paying high fees to big banks. Lower prices might help to increase consumer spending.
The rules of the Durbin Amendment would cap the interchange fee for debit card transactions. Generally, interchange fees are charged by retailers for each payment accepted with a debit card or credit card.Before the passage of this amendment, the average charge from banks to retailers per transaction was 44 cents. According to the Federal Reserve, banks collected nearly $16 billion annually on these fees to cover fraud prevention and administrative costs. Beginning October 2011 – when the new law goes into effect – the charge will cap at 12 cents.
For retailers, this appears to be an advantage in reducing the amount of bank charges. However, some note that banks will look for alternatives to the revenue loss. Consumers could end up paying the price, literally and figuratively, for the lost revenue.
Additional Provisions in the Durbin Amendment
The Durbin Amendment only affects banks that have less than $10 billion in assets.
Retailers have a choice in selecting a debit network service to process the transactions. Before the new law, retailers could only use the STAR network to process Visa transactions. This was required even if other merchants charged less.
Retailers can give discounts to consumers who pay with a debit card or in cash. Merchant agreements for both Visa and MasterCard currently ban this practice to encourage credit card use.
Problems with the Durbin Amendment
Critics observe the looming problems with the Durbin Amendment, despite its positive provisions.
Because credit cards remain unregulated, banks may choose to increase incentives such as rebates and reward points to entice more spending with credit cards. Consumers may see an advantage to using credit cards versus a debit card to earn the incentives.
Currently there there are restrictions on banks for requiring minimum purchases with debit cards, however fears do exist that with this new legislation that many banks may try and change this. For example, banks could decide to cap debit card purchases at $100, limiting big ticket purchases. Instead, consumers will be forced to use a credit card, prepaid debit card or cash. Purchases are limited for consumers who have bad credit and no credit card.
Smaller banks not directly affected by the Durbin Amendment could suffer revenue losses. Market forces might require small banks to lower rates to remain competitive.
Another problem is banks may transfer the fee to consumers to offset revenue losses. One way this could occur is by changing the terms for free checking accounts. It is possible that banking competition will prevent such changes.
How the Durbin Amendment Impacts Small Businesses
For all of its intentions to improve economic activity, this legislation will impact small businesses in several ways.
Most small businesses pay more to provide discounts than for debit interchange fees. This leaves most at the mercy of a pricing strategy. A tiered system with a merchant service company could cost more.
Small businesses could realize very little in actual savings proposed by the Durbin Amendment. For example, merchant services may have a coded system that equates to other fees such as down-grades and hidden mark-ups.
In essence, small businesses may not see any savings initially because of blended contract agreements. The net effect is that consumers who purchase from these businesses will not see any savings. Small businesses that currently do not accept debit card payments would not see any savings.
If banks raise banking fees, they may include small business checking accounts. Nearly 15 million small businesses have active checking accounts. It is estimated that small businesses could pay as much as $4.8 billion in higher fees during the two years after the Durbin Amendment is implemented.
Many small businesses will need to analyze their debit card transactions. This could help to determine whether savings is possible with their current provider, or if switching to one with lower fees is worthwhile. What works for one small business may not benefit another based on the payment card consumers use.
Conclusion
The Durbin Amendment was passed to increase economic activity among consumers and small businesses. The interchange fees enforced by the Federal Reserve could add more cost than savings to both groups. Market competition may drive banks to shift the lost revenue onto small businesses and consumers.
Larger businesses may benefit more from the reduced interchange fees and have more flexibility to pass those savings onto consumers. However, the law allows small businesses to select its merchant service for transactions. This provides more options in providing a merchant service provider with reasonable fees.
A big key here is that it still falls the each small business to ensure they are saving money with the new legislation. Make sure when you call your current credit card merchant account provider or the one you are thinking about signing with, that they are aware of Durbin and have adjusted their pricing to pass on these savings. If the representative can not quickly speak to how they adjusted their prices, or worse seems confused as to what the Durbin Amendment is, then it likely means you should find a different merchant service provider to work with.
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Advice from Fellow Small Business Owners
This is terrible for merchants handling microtransactions. It’s like a 5 cent raise for transactions under $10. No one ever sees the math for that .44 average fee, but if microtransactions are weighted, then it wouldn’t be .44. It would be much lower. Unfortunately, this is the feds and visa and mastercard looking to bank big time (excuse the pun). And what it will pan out to is forcing merchants to accept only credit cards and not debit cards. Inevitably consumers will switch to credit cards again, pick up tons of debt and cause more fallout. This is bad news for the consumer.
If you’re average charge is over $20 it is not cost effective to use pin based debit, but you might be able to get a very attractive processing fee with combined qualified rate. I’ve seen them as low as 1.29% and .21 per transaction. That is a substantial rate reduction on credit cards. I’d be happy to answer any questions on this.
If I do 20 to 30 transactions a day all between $20 and $200 how would this affect me? I own a restaurant with approx 100 seats
Wrong Melody, the Durbin amendment does NOT address credit cards – only debit cards issued by banks with greater than $10 Billion in assets.
What if I do several credit card transactions of $2k per month? Would I be saving a lot of money?
John, the Durbin amendment has no impact on your credit card transactions. If your “credit” card transactions, include a number of debit card transactions (which is normal for most businesses), then you will certainly see savings. This of course means that you need to work with a processor that has updated their pricing to pass on these savings, unfortunately many processors have taken this legislation as an opportunity to further increase their margins.
Yes, if you had several check or debit card transactions at $2K per month you would save a substantial amount. If you’re interested I could prepare a spreadsheet for you on the savings.