Federal Reserve Issues Final Ruling on Durbin Amendment - NerdWallet
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Federal Reserve Issues Final Ruling on Durbin Amendment

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The long-anticipated Federal Reserve ruling on the Durbin Amendment swung decisively in favor of the banks: the new ceiling on swipe fees, at 21 cents, is substantially higher than the 12-cent cap initially proposed. The Fed’s final judgment limited so-called swipe fees to 21 cents, plus 0.05% of the transaction. What’s more, the law will take effect in October instead of July 21st as planned.

The final ruling: 21 cents, plus a little bit more

Card issuers cannot charge swipe fees of more than 21 cents. These rules will take effect on October 1st, but will exempt prepaid debit cards. According to the Fed, 21 cents is the 80th percentile of fraud costs, and that the cap satisfied the “reasonable and proportional” stipulation. On top of the 21-cent-plus-5-basis-points cap, issuers can charge an extra penny if they comply with certain fraud protection procedures. For a transaction of $38, which the Fed estimates to be the average, the interchange fee would come out to 24 cents. That’s nearly half of the current average of 44 cents.

The Federal Reserve promised to study the debit interchange market to ensure that the regulations are having the desired effect without the collateral damage threatened by banks. Chairman Ben Bernanke said that the Fed had taken the public’s comments into consideration, and ruled accordingly.

In particular, Bernanke said that the 9-cent increase stemmed from consideration of the network connectivity, labor, hardware and software costs that went into fraud protection. It did not consider other, broader costs like human resources, legal fees and executive compensation. The new ceiling is higher than many analysts expected: Goldman Sachs thought that the final regulation would cap swipe fees at 16-18 cents.

Banks’ lobbying pays off

Since the passage of the Dodd-Frank bill, banks and credit unions petitioned to water down the regulations or remove them altogether. In addition to lobbying the Fed itself, they threw their weight behind a bill to delay the regulations sponsored by Senator Jon Tester (D-Montana). Covering all three branches of government, TCF National Bank sued the Fed alleging that capping swipe fees amounted to unreasonable search and seizure. Other banks chipped in with amicus briefs and promises to challenge the final rules in court.

Banks argued that debit interchange fees are necessary for fraud protection, and that decreased revenue would force them to levy new charges on consumers. They cited a slew of new fees and terminated debit rewards programs. For one, Chase ended its debit rewards program because of lost interchange revenue. The Fed estimated that bank revenue could fall by more than 40% once the new rules take effect, but as an appeals court ruled in the TCF case today, nothing is stopping banks from assessing new fees on their customers.

Bank and card network stocks surged in the wake of the ruling. Visa closed 15% higher, while MasterCard rose 11%, and other financial institutions saw smaller gains.

Retailers lost a battle but seem to have won the war

Retailers, of course, had lobbied just as hard to keep the Durbin Amendment intact. The 75% increase on the cap is sure to hit merchants hard, especially the smaller ones who are charged higher swipe fees. The Fed estimates that retailers hand over $1.3 billion in swipe fees every month. This setback comes on the heels of a major triumph for merchants: they successfully lobbied Congress to prevent Senator Tester’s delay bill. They can still declare victory, though, that the Durbin Amendment’s regulations are implemented at all.

Major retailers’ stocks moved little, at least in comparison to financial corporations’ rise. Macy’s and Walmart actually saw a slight rise for the day, while Kohl’s, JC Penney and Target all fell by less than 1%.

When big banks battle big merchants, do consumers win?

Lost in the scuffle is how lowered debit swipe fees will impact consumers. Retailers contend that they will pass some of their savings onto their customers, but banks and credit unions argue that free and rewards checking will become extinct. The Federal Reserve took both concerns into consideration. Bernanke predicted that retailers in low-margin, competitive markets would end up passing the savings on, while those in less competitive markets would pocket more of the savings. In sum, though, the Federal Reserve said that it is “unclear” whether debit interchange regulation will benefit or hurt consumers.

  • Groogle30

    I’d like to keep the money I earn

  • Geoffrey

    After receiving an email notifying me of the Redbox rental increase:

    New Daily DVD Rental Price

    Redbox is making an announcement about its prices today, and we want to make sure that you hear it from us first.

    Starting on Monday, October 31, the daily rental charge for DVDs will change to $1.20 a day.* The price change is due to rising operating expenses, including new increases in debit card fees. Daily rental charges for Blu-ray™ Discs and video games won’t change.** Additional-day charges for DVDs rented before 10/31 won’t be affected, either.

    In order to make the transition easier, Redbox will discount the first day of all online DVD rentals to $1.00 from 10/31 through 11/30. Additional rental days will be $1.20.***

    If you have any questions, please visit redbox.com/pricechange. There, we’ve provided additional information.

    This marks our first price change in more than eight years as we work hard to keep prices low for our customers.

    Thank you,


    I responded to Redbox w/:

    How disingenuous can you be? The federal government just recently lowered the fees being charged by banks on debit card fees for businesses and you state that they are charging more. At least have the common sense & decency to be more creative in your jacking up your prices. Check it out in the New York Times: http://www.nytimes.com/2011/09/30/business/banks-to-make-customers-pay-debit-card-fee.html?_r=1

    To which I received the following:

    To better explain, the intent of the Durbin amendment was to limit the fees debit card companies charge retailers like redbox. Unfortunately, the amendment had the opposite effect on small dollar amount transactions. Rather than limiting fees, the amendment provided debit card companies the opportunity to increase fees on low ticket transactions. The Durbin amendment provides debit card issuers the opportunity to raise interchange fees to as much as $.22 on a $1 transaction. Hope this information provides more clarity.

    If you have any more questions, please contact us at 1.866.REDBOX3 (1.866.733.2693).


    redbox Customer Care

    Question: Am I missing the bottom line facts re: the Durbin amendment? If so, could someone please direct me to the correct understanding of this?

    • http://www.nerdwallet.com/ Tim

      Hi Geoffrey, thanks for the note, you’re confusion is definitely understandable.

      Unfortunately in this case, Redbox is absolutely right. We wrote a post about this not too long ago:
      The gist of it is this: Durbin sets a cap on the maximum interchange fee that can be charged on any individual transaction. Beforehand, interchange fees were often charged on a variable, rather than fixed-cost, basis. This meant that small transactions were charged much lower fees than larger transactions, so those smaller transactions incurred fees well under what the current limit is, and larger transactions were often well above the current cap.

      In order to “make up for lost revenue” on these larger transactions, Visa and Mastercard have changed their pricing to charge the absolute maximum on smaller transactions. So while Wal-mart will likely save a lot of money on interchange now, Redbox will get hammered.

      Just another example of unintended consequences when politicians draft poorly formed regulations.

  • PoeticPossessions

    The only thing this bill did was put more money in the pockets of merchants & banks alike. All of the increases in cost will be deferred to the consumer. Merchants will pocket their savings and banks will defer the money lost in debit fees as cost to the consumer.

    • PoeticPossessions

      When I say merchants, I’m referring to big, corporate merchants. This reform remind me of the way corporate taxes work. Multi-million dollar industries get the tax loop hole breaks, while the small to medium size businesses pay almost as much in taxes as they generate in revenue. The politics & government of America is so backwards. And, it seems none of them realize (or care) that this is the foundation they are laying for their children & future generations.