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Durbin Interchange Amendment: Precursor to $132 Annual Fees?

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Durbin- 1, Banking Cabal- 0

Last night, to the surprise of Wall Street analysts and Hill watchers, Senate Majority Whip Dick Durbin scored a coup by winning a 64-33 vote (60 votes were needed) to attach his amendment to the Senate’s version of a bigger enchilada – financial reform legislation.

His amendment stipulates new rules that will lead to lower fees for merchants when you swipe a debit card in their stores. Merchants currently pay around 1% of every debit card transaction to the credit card cartel. The lower fees to merchants, in theory, could lower prices in stores. The amendment would also allow merchants to start charging different prices for things purchased with a debit or credit card, and allow them to set minimum or maximum transaction amounts (Like a $10 minimum for credit card transactions. While many merchants do this already, it’s not technically legal.)

Durbin has been trying to get support for this type of “Interchange Fee Reform Legislation” for years, but has had difficulty drumming up support until recently, now that bank bashing is in vogue. Despite this victory for Durbin, many pundits still think interchange fails to make it into the final compromise bill, given that key influential lawmakers in the House remain against it. But what happens in the unlikely scenario that it does?

What’s going to happen if the Durbin Amendment passes?

First let’s see what the big shot lobbyists and congressmen think:

  • Peter Welch, Rep (D-Vt) thinks, “This momentous, overwhelming vote sends an unambiguous message to credit card companies that the American people have had enough of swipe fees and have had enough of cash register rip-offs.”
  • But MasterCard countered by issuing a statement saying, “This amendment helps big merchants, but consumers will pay the price.” (you’ll see why we agree below.)

At NerdWallet we like to stick to the numbers – so we look to Australian credit cards for answers. While the situation in the US is a bit different (it’s just debit cards for now), it could be the beginnings of interchange regulation spreading into credit cards as well. The Australian government capped credit and debit interchange in 2003, which has resulted in some crappy credit card offers compared to what we have stateside.

The average annual fee in Australia is $132, compared with $19 in the US, based on our database of more than 125 Aussie cards and 600 US cards. Rewards programs are also far inferior, as you might expect, and APRs average a full 4% higher than in the US. Typically the only “no annual fee” credit cards in Australia are the ones that have 0 day grace periods, meaning that you accrue interest payments even when you pay your bills on time each month.

“Half of the stores in Sydney charge 2% more for you to use a credit card. That’s why I use cash whenever possible,” says Kim, a Sydney resident and NerdWallet user.

Consumers are not saving any money if they continue using their cards

While it’s impossible to quantify how interchange regulation is re-distributing profits between lower prices, credit card company profits, and merchant profits, it doesn’t seem to us like this benefits the consumer at all. Merchants know what price you’re willing to pay for their goods, so they have no incentive to lower prices, but will likely use this regulation to justify raising prices on card users.

Even if merchants are honest and decide to lower prices for cash payers by 2%, the credit card user is still getting double-taxed – once by the merchant in terms of a “credit card surcharge”, and once by the credit card company in terms of higher annual fees, higher interest rates, and lower rewards.

The only potential winners in this situation are merchants and cash payers, and the cash users will only benefit if merchants actually lower their prices!

This post was featured in the Carnival of Personal Finance at Money Relationship.

  • Jamal Streyer

    This seems like a politically motivated anti-bank populist solution that won't do much good!

  • dana h

    is Australia really comparable to the US? it's crazy that their fees are so high!

    • http://intensedebate.com/profiles/nerdwallet nerdwallet

      Yep, the only thing that really sets their credit card market apart from the US is the regulation, which had predictable results – Credit cards have much higher fees and lackluster rewards programs than here in the US.

      Plus card holders in Australia expect to spend more, so they rarely bother to use their cards.

      • John M

        First, your 1% is hogwash. I own a small business – and if you want to know gouging, take a look at my monthly reconciliation. It's all .03 for this and .05 for that. When it's done, it's more like 2.9%. Why do I have to subsidize some crappy frequent flyer program that doesn't even let people use the miles? And I do, and I'm not given any say in the matter. These guys have been asking for it, and it's not Walmart winning – it's the coffee shop, the dry cleaner, anywhere people have been encouraged to just swipe the card. It's a convenience for the consumer, so pay for it and stop whining, and don't blame merchants who are finally allowed to show you what it really costs.

        • nerdwallet

          Thanks for the comment John, but I don't think you fully understood what we're getting at. Of course this regulation will be good for you, and we're all for helping small businesses. However, Congress tries to justify such regulations as helping the consumer at the expense of the big, bad banks when that's not at all what will happen.

          So in the end, businesses will win because they can get away with charging higher prices. Banks will win because they will just gouge consumers some other way. And consumers will get it from both ends.

        • cwilson

          Ok Mr. Business owner….maybe you should go back to taking cash only and checks and see how you like it. The facts are that Visa and MC with the financial backing of card issuers have create a global payment system that consumer value and trust. You receive great benefits from the system. No handling cash, zero liability on fraud as long as pin is used or the ticket is signed, funds automatically placed in your account, and maybe some of customers can only pay with credit just a to name a few. If you do not want these benefits drop your account with you merchant acquirer. Oh wait……consumers want to pay with cards. Don't fault someone else for designing a profitable value base business model because that is capitalism. You can't act like businesses receive no benefit from card acceptance.

          • anonymous

            He didn't say that his business receives no benefit from credit cards. He said that it would be nice to show consumers exactly what it really costs to use their card. The legislation would allow him as a small business owner to charge more for credit card purchases, so that those of us who use cash don't have to subsidize other consumers who use credit cards.

            I disagree with governmental caps on merchant fee rates, but I absolutely agree with regulation that would allow merchants the freedom to charge a different price for cash and card purchases.

  • CSM

    Ok..nerdwallet,,,small business owners are consumers, too. what is going to protect us from the high bank fees and the exorbitant processing fees especially from people who want to use their cards to purchase items that cost less than a dollar? How are we supposed to stay in business if we don't raise our prices to pay the fees? Or do we just give up and join the ranks of the jobless…that will be good for the economy, won't it? So…what do you predict will happen to us…it does not sound like you recognize small business owners as consumers, or that you think we deserve any protection and we ARE already getting it from both ends!

    • http://intensedebate.com/profiles/nerdwallet nerdwallet

      Ok, I apologize. This post was geared specifically toward the consumer, but since we're getting so many comments from small business owners, let me qualify our argument.

      In Australia, when interchange regulation went into effect, the law actually capped interchange fees, so that issuers could no longer gouge merchants. That was undoubtedly good for small businesses, and the expense only got passed to cardholders through annual fees. In the US they decided to allow the price gouging to continue, only now merchants can be transparent about passing them through to consumers. This way small businesses are still getting charged absurd fees, and consumers are getting double-taxed on it.

      As for whether it's good for small businesses in this case, I'm not convinced. Credit cards have become so prevalent in the US that if you start charging extra or imposing minimums on card transactions, there is no doubt that you will lose customers to businesses that impose no such restrictions. On top of that, studies have shown that people spend more when using credit cards than with paying cash, so it's possible that your revenue per customer takes a hit. Larger merchants that have more advantageous deals worked out with card issuers (for example, Wal-mart) can afford to not pass these fees through to customers, which will earn them market share at the expense of small businesses.

      So in conclusion, we have no problem with interchange fee regulation that helps small business. But we don't believe that the regulations as they've been proposed are actually going to help.

      • anonymous

        So you're not convinced that it'll help small business. Fair enough. However I don't understand how you get from there to the notion that it's preferable to deny small business the choice of whether to pass along merchant fees to their customers.

        If it doesn't help them, they're still free to charge the same price for credit cards & cash. Small business will do whatever they need to do to compete — this just gives them another tool to work with if they so choose, and in that sense it can only help.

        Another angle here is that credit card spending itself isn't really all that "good for consumers". Cheap cards aren't an American birthright, and one could argue that they do more harm than good.

  • http://bowersvideo.blogspot.com Virgie Kruse

    Incredibly awesome read. Really.

  • Adrienne_in_CA

    You don't mention that the Durbin amendment exempts banks and credit unions with less than $10 Billion in assets — that's 99% of them. Of the $48 Billion in interchange fees charged in 2008, 80% were paid to 10 large banks. That's who's gouging the merchants, and that's who this amendment targets. Read more at: http://durbin.senate.gov/showRelease.cfm?releaseI

    *****A

    • Truth In Facts

      … Read what you just wrote.
      99% of banks. But where are all the transactions happening? With small banks, or with big banks (Chase, BB&T, and the horrible BOA) and Credit Unions(NFCU). So they exclude 99% in number, that doesn’t translate to 99% of card-holders. So yes it will affect almost everyone!!
      And of course 80% of the money was paid to the 10 largest banks; they are the ones who are issuing cards out. Do you expect them to just donate the money they get from interchange fees on Their cards to smaller banks?
      All they did on the site was take facts and display them in a way that looks like they are trying to help America's consumers, when really all he is trying to do is line his pockets with lobbyist gifts, and campaigning money

      You pulled all your information off a site that is trying to twist a horrible amendment into sounding like a righteous crusade against evil banks.
      Lets take a step back.

    • Truth In Facts

      1: None is required to accept credit cards.
      2: I like getting 2-5% cash back on purchases
      3: If you are a small business owner and your business plan does not take into consideration the interchange fees that have been in place almost since credit cards became mainstream… Than maybe you shouldn't be a small business owner (or at least one that requires accepting Credit Cards), because chances are if your plan can't coupe with that you are going to just end up failing in another area anyways
      4: Even if they did cap the fees, like Nerd Wallet said do you really think that anyone is going to lower their prices? You won’t see prices lower, but you will see credit card fees; and on top of that banks will have to start charging annually/monthly fees on checking accounts.
      5: Where are they getting these numbers that banks are gouging fees… the fees don’t just pay for processing and admin fees, they pay for the rewards, 0% apr, concierge, and protection you get from your credit card.

    • Truth In Facts

      And just incase any "small business owners" think about complaining to me… I have no pity for you:
      I am a small business owner, I have a merchant account. I pay aprox 1-2% depending on how many AMEX I take in a month. But how many people want to walk around with $1000 in cash just to pay for a service and who is going pay for a money order to send me in the mail? So I pay my $20 dollars a transaction and I don’t have to deal with bounced checks. Now your telling me that you want my clients that cant get credit cards to cancel their debit card service so they don’t have to pay the fees attached to have a check cards, and than pay me by check (and no they wont want to get a cert check because the banks will all be charging for those if this passes) so that I can pay a collection agency to collect on all the bounced checks that will be given to me.

      Personally I'm not in favor of trading one evil for another, especially when I'm trading it for a evil that the government will have a hand in.

  • anonymous

    Blame Canada

    • billy bob

      What does Canada have to do with anything?

      • anonymous

        It seems that everything's gone wrong since Canada came along….

  • anonymous

    They are sitting up there jsut chilling planning to take over the world thats what they have to do with it.

  • deskpilotde

    Every time I use my VISA debit card at a SMALL business, I ask which would THEY prefer to reduce their cost. I costs me nothing whether I sign a slip or punch a PIN. I want a small business to succeed and go out of my way to keep their cost down. I prefer to use cash for small purchases and use my card for bigger purchases because the cost can be absorbed by the total expected profit from the sale.

    Example, you spent 20 work days a week stopping for coffee. 60 custs/hr x $.05 is $3.00 / hr that you cost the business. Multiply that buy a few hundred loyal customers and pretty soon you're talking real deterioration of profit. That cost might be an unhired employee to help move the line faster.

    Try it, and save a business a few cents a day.

  • Charlie

    I think one huge point that many people are failing to see is that the small businesses benefit a lot from people carrying cards. People always have cash available for purchases so the business can always make sales. I for one am tired of the goverenment trying to babysit all of us. It is the consumers choice to have credit cards. It is the businesses choice to accept the credit cards. The businesses win by getting more customers and the customers win by having a safe and easy way to pay. If we take away the fees we will lose the free checking and other benefits we get from them. So the consumer will pay like .05 cents a check. The governement is trying to control everything and people are following just like brainless Zombies. This guy is just another idiot who wants his name on a bill.

  • Wake Up

    I am not going to answer any responses to my post as I am leaving the site after this, but here it is in a nutshell. You can complain about it , discuss it, get mad about it , or do nothing and in the end whatever happens happens anyway. If everyone really feels so strongly about this topic or something else then do something about it. I will say this…maybe you won't see it, but maybe your kids will. If things keep going the way they are, there will be no reason to go to work as all of your money will be going to taxes or businesses. I think a lot of the homeless, beggars, prison inmates, and welfare recipients are all well aware of this already and that's why they do what they do. So next time you see one, think about what the future holds for all of us if something isn't done to stop it. There always seems to be money available when it is needed or when there is a stimulus payout or we are bailing out wall street banks. Does this mean that certain entities will not even slightly be affected if we were all bankrupted…probably so due to an abundance of surplus cash. Control all the cash…control all the people.