Tomorrow, on October 1st, the first provisions of the Durbin Amendment will take effect. Debit card interchange fees will be capped at 21 cents plus 0.05% of the transaction, with the possibility of an additional cent if banks and card networks comply with certain security procedures. Banks argue that interchange fees are necessary to fund fraud protection, but for every dollar they pay out in fraud costs, ten are collected in swipe fees. Interchange fees have skyrocketed in recent years, placing a particular burden on small retailers and restaurants, which are charged the highest fees. In fact, for many merchants, interchange fees are their second-largest expense after labor.
But the cap on debit swipe fees is hardly a clear-cut victory for consumers. Consumers have seen their debit rewards cancelled or cut back, their free checking accounts disappear, and their minimum balance requirements increased. Even the Federal Reserve, who issued the regulations, is unsure whether consumers will be helped or hurt.
Surely, then, retailers will benefit from this legislation? Not so fast. Visa and MasterCard have a chokehold on the credit card processing network, and as any Econ 101 student can tell you, a duopoly gets to dictate prices. Visa has already implemented a number of screw-you-merchants provisions, and we’ll likely see more.
Since Dodd-Frank passed in July 2010, we’ve seen lobbying, mudslinging, legislating, negotiating and renegotiating. But the fallout from Durbin has only just begun. Here’s what we think will happen now that debit swipe fees are capped.
1. Banks: Don’t use a debit card
Even before the final regulations of the Durbin Amendment were announced, banks began to dismantle free and rewards checking. Chase explicitly blamed Durbin in its letter informing customers that their rewards would be cancelled, dangling the promise of reviving it should the amendment be delayed. Others, from Bank of America to TD Bank, did away with unconditional free checking. Look to see more disincentives to use debit: Wells Fargo and Chase are piloting monthly debit usage fees, and they have little reason to care if their checking customers become fed up and leave.
2. Please, anything but a debit card
Debit cards are suddenly less lucrative for banks. Credit and prepaid debit cards are substitutes for these newly unprofitable products. In addition to the sticks of monthly checking fees, banks offer the carrots of better credit card rewards. Signup bonus after signup bonus hits the credit card world, enticing customers to use interchange-rich rewards credit cards. No-fee credit cards get their day in the sun as well: if a checking account comes with a $10 monthly fee, a $59 annual credit card fee seems quite reasonable by comparison.
3. Higher swipe fees for retailers
You’d think that merchants would be the clear beneficiaries of interchange fee regulation. But two factors work against them, and make it entirely likely that they’ll see an increase in fees. First: a merchant never gets a bill that includes a line item of interchange fees. The charge is bundled along with other charges by a third-party processor, which could charge the same amount and pocket the interchange fees without the merchant being the wiser. Second: PIN debit fees are actually the lowest charged by card networks. Those for credit and signature debit transactions are much higher. As banks shepherd their customers toward credit, a smaller share of plastic transactions will come from debit. This will result in higher overall fees paid by the retailers.
4. Charging more for the burger
JPMorgan Chase CEO Jamie Dimon quipped, “If you’re a restaurant and you can’t charge for the soda, you’re going to charge more for the burger.” Consumers see this most readily in checking account fees, but retailers are getting squeezed as well. In addition to the relatively passive spending shift from debit to credit, Visa and MasterCard are actively changing their terms to gouge certain retailers. Pre-Durbin, a small retailer might be charged 10 cents plus 1% of the transaction, for a swipe fee of 17 cents on an $8 sandwich. Now, as a nice little eff-you, Visa and MasterCard will charge small retailers the maximum amount allowed on lower transactions. That same $8 sandwich will now come with a 26-cent interchange fee, just because the card networks can. Visa plans to institute a network processing fee, levied on retailers for the ability to accept Visa-branded cards. Expect to see other fees that retailers won’t be able to escape without turning away a prohibitive number of customers. Charging for the burger, indeed.
5. The eventual reduction or removal of Durbin
This is likely the most controversial prediction here. Most of Durbin’s effects we’ve already seen to some extent, and trends will only continue. But if the Durbin Amendment is repealed, or even watered down further, it will be a significant policy change.
In June, Senator Jon Tester (D-MT) introduced a bill to delay the Durbin Amendment’s implementation for 24 months (it was later reduced to 12 to garner votes). The bill passed the Senate with 54 votes, but fell short of the 60 required to forestall Senator Durbin’s filibuster. Legislation, it seemed, would support swipe fee reform.
But Visa, MasterCard and many larger banks made an outsize response to swipe fee reform. They’ve made program cuts that directly affect consumers, and may actually increase interchange fees on retailers, leading to higher prices. They’ve not been quiet about it, either: every negative move they make is accompanied by, “Durbin made me do it.”
The nuances of a variable 21-cent cap compared to a fixed 12-cent one might not capture the public imagination, but you’d better believe that retailers will make their voices heard should their fees rise. The National Retail Federation and other industry groups were the main supporters of the Durbin Amendment; consumers, for the most part, were indifferent. If the regulation loses merchants’ backing, it will probably be scaled down or withdrawn altogether.