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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: Twitter: @margarette.

Updated Aug. 26, 2015.

Image via iStock.

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  • Jeff

    Great post! This is the best explanation I’ve read.
    I’m sure that the merchants will appreciate the saving that this amendment represents. It will be interesting to see how this will affect consumer purchasing behaviors.

  • Miguel

    Great Read! But I would not believe anything that comes from an exec in Wal-Mart. They are the negative examples in most business text books on business practices!

  • Funancials

    This is a fantastic explanation from all sides.

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  • Russ

    Like practically every analysis I have read, this one completely ignores what is actually the core of the problem, at least for small to mid-sized merchants, and what the Durbin amendment fails to address. The credit card associations, Visa/MasterCard/Discover, and the banks which issue the cards are not the only players in this game. It is the third player, the credit card processor, that is often responsible for most of the abuse.
    When you make a purchase with your credit card and the merchant swipes your card, the transaction is sent to a processor who authorizes (or declines) the transaction and sends it to your bank which then pays the merchant, minus fees. I am a sales agent for such a processor. I visit merchants and ask them to use my company’s services rather than the services of one of my competitors. There are 2 pricing models used by processors. One is called “buy rate” in which the processor jacks up the credit card association’s rate on each transaction. This model lacks transparency because when the mercant sees his statement he has no idea what portion of the is going to which entity. The second model is called “pass through” in which the actual association fees are charged on every transaction and a mark-up is added at the end of the statement so the merchant can see what he is paying to the processor. My company uses the pass through model.
    I am looking at comparisons I have done for 2 merchants who had no clue what they were paying to their processors. The first has credit card sales of $20,439.84 and is paying $600.14 in fees, or 2.94%. The actual fees to the associations and banks are $315.20 and his processor additional fees are $284.94. Remember, the processor is increasing the rate on each transaction so it is impossible for the merchant to see theses charges. Our company will pass through the $315.20 and add fees and mark-up of $84.08 for a total of $399.28 or 1.95%.
    The second comparison is even more dramatic. The merchant has credit card sales of $9858.68. The actual association and bank fees are $193.92 which his processor has increased by $391.45 for a total of $585.17 or 5.94%. We would charge only the $193.92 pluss fees and mark-up of $65.94 for a total of $259.86 or 2.64%.

    • Karen Simpson Wells

      Would like to talk to you about processing fees. We are a small B & B !

      • Merchant Advocate

        Hi Karen, supports True Interchange “Pass Through” Pricing. Our mark-up is only 0.25% + $.10/transaction

    • Bonnie

      So, even your processor company ends up charging a business with smaller credit card sales a larger percentage than a business with greater credit cards sales? That is the keystone of the problem in this country.

    • Hug Me….

      looks like a buy rate if I ever saw one…

      • Hug Me….

        UP, UP, UP, Up, up, uP, UP, oh, no mr. dummyman, this is Pass Through..

        • Hug Me….

          Oh, Uh…. Who do I give My money to then???

          • Hug Me….

            Oh, don’t worry dummyman, we’re here for you…

          • Hug Me….

            .05% is the law. If you’re paying more than 5 Cents per swipe you’re being swindled.

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  • Holly

    Russ, you speak of “our company”. Are you a processing company? I’d be interested in making the switch…thanks for your no-nonsense explanation.

    • Chad

      What type of business are you? Small to medium ?