The Durbin Amendment

On October 1, 2011, new rules went into effect that lowered the debit card interchange fees the Visa and MasterCard networks charge merchants. The changes — resulting from Durbin Amendment passed as part of the Dodd–Frank Wall Street Reform and Consumer Protection Act — would appear to be a plus for merchants. But are they?

At issue are the so-called “swipe” fees passed along to businesses as part of their credit card processing agreement with their merchant services provider. Interchange fees were originally imposed by the credit card networks to offset their costs of processing the transaction and fraud prevention.

Swipe fees vary depending on the type of card used in a transaction (credit, debit, prepaid) and the merchant. Typically, larger merchants have more negotiating power when it comes to fees than smaller merchants.

Prior to the implementation of the Durbin Amendment, the swipe fee for a debit card transaction averaged 44 cents. Under Durbin, the Federal Reserve has set a cap of 21 cents per transaction plus .05% of the transaction total. (It is important to note that the new rules apply only to Visa and MasterCard debit cards — not credit cards — and only to issuing non-exempt institutions with $10 billion or more in total assets.)

Card processing costs are often a merchant’s second highest expense after labor, so lower swipe fees for debit cards should be a welcome development, particularly as the cards have grown in popularity with consumers, surpassing both checks and credit cards. Debit card transactions in the U.S. totaled 25 billion in 2006; by 2009, the number had reached 38 billion.

Issuing banks like debit cards because they’re profitable, generating $16 billion in transaction fees in 2009 alone. To make up for the anticipated loss in revenue from the lower swipe fees, many banks have begun tacking on new checking account fees, raising minimum balance requirements and have threatened to cap the dollar amount for debit transactions and end debit card rewards programs. At the same time, banks are trying to renew customer interest in more profitable credit cards and general-use, reloadable prepaid cards with offers of low interest and rewards bonuses.

So, what’s the bottom line for merchants? It depends, to a large degree, on how customers react over the next year or so. If they stick with paying for their purchases with a PIN-based debit card, merchants should come out ahead because those transactions incur a lower swipe fee. If they pay with a credit card, the interchange fee is calculated as a percentage of the sale (usually about 2%), which can quickly exceed the capped 21 cent swipe fee they’d be charged for the same transaction on a debit card.

Obviously, it’ll take some time before the true impact of the Durbin Amendment is known, so stay tuned.

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