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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.