How the Durbin Amendment Affects Debit Card Fees

How the Durbin Amendment Affects Debit Card Fees


Merchants are continuing to learn about and understand the Durbin Amendment, a law that went into effect in 2011 as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

The intent of the legislation, sponsored by and named after Senator Dick Durbin of Illinois, was to lower prices for consumers by reducing merchants' debit card fees.

One unintended consequence of the Durbin Amendment amounted to higher debit card fees for merchants who frequently process small transactions. As banks are earning less through debit card transactions, they are making up for lost revenue in other ways, and some merchants are feeling the effects by paying higher debit card fees.

Durbin Amendment Debit Fees for Smaller Transactions

If you are a small business owner that regularly processes smaller debit card transactions, you have undoubtedly noticed that your costs have increased in the wake of the Durbin Amendment taking effect. Durbin has prompted banks and card issuers to redress how they determine and levy transaction fees. Prior to the Amendment, fees were a variable percentage based on the purchase amount and, as such, merchants paid smaller fees on smaller purchases and larger fees on larger purchases.

But after the Durbin Amendment passed, Visa and Mastercard began charging the maximum amount for smaller transactions. Instead of paying an interchange fee of $0.06 on a purchase of $3.50, merchants are seeing fees of $0.21 on the same bill. In order to accommodate these exponential rate increases, retailers have been forced to increase their prices.

According to a 2018 research paper published by Natasha Sarin of the University of Pennsylvania, some small businesses needed to increase prices by 20 to 40 percent after Durbin.

Sarin wrote, “Small business owners decried Durbin's impact. An owner of New York coffee houses said, 'My choice is to raise prices, discount for cash, or get an ATM.' Another merchant said that when customers offer a card to purchase a banana, he gives it to them for free. "Just take the banana. Don't give me the card.'”

Still, it's important to point out that many retailers are paying less in debit card swipe fees as a result of the Durbin Amendment. Depending on transaction size and card issuer, maximum fees range from $0.21-$0.24 cents whereas, prior to the Amendment taking effect, those same fees averaged $0.44. This means that the Durbin Amendment has shaved 45% off what merchants pay in processing fees.

The Purpose of the Durbin Amendment

The government passed the Durbin Amendment partly to improve economic growth. The thinking was that if transaction fees for swiping a debit card were lowered, then businesses could decrease overall prices, resulting in higher spending among consumers.

To support smaller financial institutions, the Durbin Amendment required banks with fewer than $10 billion in assets exempt from the limits. These smaller banks can charge a higher percentage on debit card transactions than their larger competitors.

The purpose of the Durbin Amendment was to improve and preserve the welfare and best interest of consumers. Banks have insisted that the only way they can recoup what has been saved through legislation is to increase consumer fees in other areas. In response, retailers have had to increase their prices, hurting consumers in the pockets and antithetical to the Durbin Amendment's stated purpose.

The Impact of the Durbin Amendment on Banks, Merchants, and Consumers, a 2019 article published by University of Pennsylvania's Law Department, found that debit card fee savings hinge on the level of retail industry competition and the frequency with which consumers use debit cards to complete transactions.

However, the study did not find an across-the-board price reduction for all stores. Retailers in less competitive markets may be keeping the cost savings for themselves rather than passing the money on to their customers.

Merchants are embracing cash discount programs in order to offset the rate hikes. The Durbin Amendment has loosened legislation around cash discounting as an incentive for customers who choose to pay with cash over credit and debit cards. These discounts are legal in all 50 US states under the Durbin Amendment.

What the Future Holds for the Durbin Amendment Debit Card Fees

Some will argue that the Durbin Amendment imposed much-needed reforms for debit interchange fees and brought certainty for retailers and a level of transparency. Others will say the law has not delivered on its promise, and efforts to repeal or update the law have been ongoing for several years.

Most recently, the Retail Industry Leaders Association (RILA), a U.S. trade association, issued a statement in February, calling on Congress to ask the Federal Reserve Board chairman to “set a true rate” for debit card transactions that would reflect the intent of the Durbin Amendment to the Dodd-Frank Act.

Whether Durbin will change in the future remains to be seen. Regardless, it's important that merchants learn how it changes their bottom line. Sekure's ETA CPP Certified payment professionals are here to answer any questions you may have about how it affects your debit card fees. Give them a call.

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