The Durbin Amendment

The Supreme Court’s refusal in January 2015 to review a challenge to the Durbin Amendment means the Federal Reserve can proceed with full implementation of the regulation it devised.

Enacted in October 2011 as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the intent of the Durbin Amendment was to set limits on the interchange fees paid by merchants to large banks to process debit card purchase transactions while giving the merchants more choice in which network to use to route debit card payments.

Interchange, or so-called “swipe”, fees are 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 Durbin Amendment, the swipe fee for a debit card transaction averaged 44 cents. Under Durbin, the Federal Reserve 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.)

Subsequent to the implementation of the Durbin Amendment, a group of retailers sued the Federal Reserve Board of Governors, maintaining that its final rules to implement the Durbin Amendment were “arbitrary, capricious, an abuse of discretion, and otherwise not in accordance with the law”, that the interchange fee cap had been set too high, and that the non-exclusivity rules for payment networks should apply to all debit card purchases, and not just to the ones requiring the customer to input a PIN code.

In July 2013, a U.S. district court judge in Washington, D.C. ruled in favor of the plaintiffs, saying that interchange fee caps should be based on costs associated with authorization, clearing and settlement of an electronic debit transaction, but not include other costs that the Fed included in its final ruling for a 21-cent transaction cap, plus the percentage of the transaction cost.

The Federal Reserve appealed that decision to the U.S. Court of Appeals for the District of Columbia, which reversed the major elements of the lower court ruling in March 2014.

The retailers appealed to the Supreme Court, arguing that the regulation set such a high fee cap that it flagrantly watered-down the intended effect of the Durbin Amendment. On January 20, 2015, the Supreme Court declined to review the lower court’s ruling, paving the way for the regulation’s implementation.

Card processing costs are often a merchant’s second highest expense after labor, so lower swipe fees for debit cards would have been a welcome development for them, 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 had started tacking on new checking account fees, raising minimum balance requirements, threatening to cap the dollar amount for debit transactions and ending debit card rewards programs. At the same time, banks tried to renew customer interest in more profitable credit cards and general-use, reloadable prepaid cards with offers of low interest and rewards bonuses.

At least one published report indicates that disappointed major retailer groups, including the National Retail Federation, are vowing to keep fighting the battle over swipe fees on other fronts, including in the halls of Congress. They point to pending litigation on credit card swipe fees and are concerned by what they call the “anti-consumer and anti-competitive practices of the card industry.” Stay tuned!

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