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The Durbin Amendment Explained

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The Durbin Amendment Explained Story

Every time you swipe your debit card, you draw into play the Durbin Amendment — a law that costs consumers an estimated $4 billion annually.

The amendment, part of the 2010 Dodd-Frank law, sharply lowered debit card interchange fees — charges that stores pay banks when a customer makes a purchase. Supporters said the measure, sponsored by Democratic U.S. Sen. Dick Durbin of Illinois, would lower prices for consumers by cutting retailers’ costs.

But when the rules took effect in 2011, big banks started recouping lost revenue — $14 billion a year, according to a 2014 Federal Reserve paper. Consumers faced increased fees and a reduction in perks, such as debit card rewards programs and free checking.

Opponents, such as banks and credit unions, have said the law actually has hurt consumers overall and hasn’t resulted in lower retail prices. A study from the George Mason University law school determined that retail prices didn’t drop after the law passed.

But supporters, including retail trade groups like the Merchant Payments Coalition and the Association for Convenience and Fuel Retailing, say that prices have dropped and that there should be more swipe-fee changes. The amendment didn’t affect credit card interchange fees, for instance. These trade groups have made reducing credit card transaction fees a high priority, even as they push for further curbs on debit card costs.

Effects on consumers

After the Durbin measure went into effect, fees on deposit accounts increased an average of 3% to 5%. The increases consumers faced included:

  • Monthly account maintenance charges (with higher minimum balance requirements to avoid those monthly charges).
  • Insufficient-funds fees.
  • Inactivity fees.

Banks also cut back on debit card rewards programs. In their place, banks added more rewards to credit cards, which weren’t covered by the Durbin Amendment.

Some experts say that the amendment has slowed the transition to EMV debit cards, which hold microprocessors that make transactions more secure.

How to get better bank rewards

Because the amendment doesn’t regulate swipe fees for credit cards or prepaid debit cards, banks now offer more rewards options for credit cards. To earn these rewards, consider using a credit card for most of your purchases. This approach works best if you pay your balance in full every month. Otherwise, the interest you pay may offset the value of any rewards.

You could also consider switching to a better checking account. The Durbin Amendment exempts financial institutions with less than $10 billion in assets, which excludes most community banks and credit unions. Many smaller institutions still offer free checking, and some still provide debit card rewards.

Effects on small retailers

  • Some retailers are paying less in debit card swipe fees. Before the amendment, retailers paid an average of 44 cents for a typical debit card transaction, then valued at roughly $38. The Durbin rules meant that for that typical $38 purchase, the maximum fee would be about 24 cents, 45% less than the average cost before the law took effect.
  • Merchants that regularly process smaller debit card purchases may have seen costs rise sharply. Before the amendment, many banks and card issuers based transaction fees on a variable percentage of the purchase value, so merchants paid smaller fees on smaller purchases and larger fees on larger purchases.

    But after the rules took effect, Visa and MasterCard began charging the maximum amount for smaller transactions. So, for example, instead of paying a 6-cent interchange fee for a $3.50 charge for coffee and a doughnut, a shop owner suddenly faced a fee of 22 cents for the same bill.
  • Merchants have fewer free business checking accounts to choose from, as many banks eliminated them to help recoup revenue losses. But according to the Fed paper, banks have recouped less than a third of lost swipe fee revenue.

The Durbin Amendment benefited many larger merchants, however, especially those that sell big-ticket items, as it cut the average swipe fee they pay almost in half. But it remains unclear whether savings have been passed on to consumers. Knowing the amendment’s effects on banks and rewards programs can help you make smart decisions about how you use your cards.

Margarette Burnette is a staff writer at NerdWallet, a personal finance website. Email: mburnette@nerdwallet.com. Twitter: @margarette.

Updated Aug. 26, 2015.


Image via iStock.

  • Jonathan

    Given that Visa, MC, and most others have rewards tiers, is that outside of the tiered vs. interchange+ argument? I know we are talking about processors here, but are actual card networks allowed to charge higher interchange on their ‘premium’ tiers vs. lower tiers (Visa traditional vs. signature)? Or do they all charge the same interchange regardless of tier?

  • http://thesituationreport.tumblr.com Dax Bermudez

    This article is full of errors and omissions. For example, STAR is not owned by Visa, it is owned by First Data, one of the largest acquirers in the US. Interchange fees are not set by the payment networks, Visa and MasterCard, interchange fees are actually set by the card issuers. Visa and MasterCard are responsible for settling the interchange fees between the issuer and acquirer.

    • Rob Leighton

      I worked for both Visa and MC, they set the interchange rates.