What is The Durbin Amendment?

When you use your debit, credit or prepaid card at a store, the merchant has to pay an interchange, or “swipe,” fee. The fees vary in proportion to perceived security risk, based on:

• The card used: Debit cards have the lowest interchange fees, while high-limit signature rewards cards have the highest.
• The method of payment: Card-not-present transactions (like buying online) have high fees, while PIN transactions have low fees.
• The type of merchant: Gas stations, small restaurants and small business owners pay the highest fees, while big box retailers like Walmart and Safeway are able to negotiate lower prices.

The interchange fee is supposed to cover the risk of fraud, transactional costs, and other overhead, but due to the lack of negotiating power on the merchant side, it’s now a major source of profit at every bank that offers checking accounts. Subsequently, competition between banks has caused this profit center to be used in subsidizing premium services, like free checking accounts and surcharge-free ATMs, and using credit card rewards to incentivize usage. For this reason, now that swipe fees are lowered, we see banks charge more and more for those services.

Supporters of the Durbin Amendment contend that this opaque pricing system unfairly burdens small merchants and the poor. Interchange fees take up an outsize portion of small business’ budgets, and before Durbin, they were not allowed to offer discounts for cash or enforce credit card minimums. The poor are less likely to see perks like credit card rewards, but still pay more to cover the merchants’ higher costs. Durbin sought to address these problems.

The amendment had two major goals: to introduce competition into the debit processing network, and to cap swipe fees just in case competition didn’t lower prices.It explicitly exempts financial institutions with less than $10 billion in assets, a designation that includes most community and state banks, and all but three credit unions, and will be implemented in full in 2013.
Among the quickly implemented, less controversial provisions:

1. Merchants can impose a $10 minimum on credit card transactions (this number can be adjusted by the Fed as they see fit). Previously, Visa and MasterCard banned this practice in their merchant agreements.
2. Merchants are allowed to give discounts at the register to those who pay with cash or debit cards. Previously, Visa and MasterCard banned this practice in their merchant agreements.

More divisive were the interchange fee cap and “network exclusivity” provisions. In the legislation, the Federal Reserve was directed to:

1. Cap debit interchange fees at a reasonable rate that would still cover fraud protection costs, and
2. Eliminate requirements that debit cards be processed on only one network.

The Federal Reserve initially considered a 7 to 12-cent fee cap, and a requirement that each debit be able to be processed on two independent networks for each method of verification – two for PIN, and two for signature. But after the Durbin Amendment barely survived a challenge from Sen. Jon Tester, the Federal Reserve issued its final ruling on June 29th, 2011. The Fed’s interpretation of the Durbin Amendment is generally seen as more favorable to the financial industry than expected.

1. Debit card interchange rates are capped at 21 cents plus 0.05% of the transaction, with the possibility of an additional cent if certain security criteria are met.
2. Each network must be able to be processed on two independent networks, one for signature debit and one for PIN.

Courtesy of: http://www.nerdwallet.com/blog/banking/durbin-amendment-explained/

For further information on The Durbin Amendment and how this landmark decision can impact your business, feel free to contact Dave Capra "The Debtonator" at 888.729.8429 and request a FREE cost analysis of your credit card processing.