New legislation, known as The Durbin Amendment, soon will lower costs for merchants that accept debit cards. The Durbin Amendment also introduces more competition by stopping credit/debit card networks from imposing anti-competitive restrictions on merchants.
The new legislation goes into effect October 1.
With a lack of federal oversight, US interchange fees have been among the highest in the world. Although the cost of processing debit cards is lower than the fees associated with credit and commercial cards, the fees are still high.
The Durbin Amendment sets a cap of 0.21 cents on debit card interchange a reduction of about 53% percent from present levels. Once the Durbin Amendment rules go into effect, businesses should renegotiate their current fee structures to ensure lower fees are passed back to them.
Provisions of the Durbin Amendment
The Dodd-Frank Wall Street Reform & Consumer Protection Act was passed into law in 2010. Section 1075 of the Act, known as the Durbin Amendment, contains the following provisions:
· Allows merchants to offer discounts to customers who use cash, checks and debit cards or a competing network (e.g., the amendment would let a store that accepts Visa offer a discount for a customer to use MasterCard or Discover – currently prohibited by Visa).
· Allows merchants to set a $10 minimum for credit card transactions without a penalty from card networks.
· Prevents card networks from requiring that their debit cards be transacted exclusively on one debit network. Merchants can use a number of PIN networks for debit transactions; however, the large networks have negotiated exclusive agreements with many banks to be the sole PIN network. (The logo of the exclusive PIN network appears on bank debit cards.) The amendment enhances competition by outlawing such exclusivity.
· Requires the Federal Reserve to determine if the current interchange fee structure is both “reasonable and proportional” to the real cost of processing a debit card transaction.
Why the need for the Durbin Amendment?
The increased use of credit and debit cards by consumers has been accompanied by higher costs to merchants, often in the form of higher interchange fees.
Interchange fees, which are the lion’s share of all debit/credit card fees, cover the cost of processing a transaction. However, these fees have continued to rise despite decreases in processing costs.
Why the increases? Competition between Visa and MasterCard to attract card issuers (who receive the interchange fees) has been a driver, as has the cost of ever-more attractive reward programs (which are passed onto the merchant via the interchange rate).
Most significantly, Visa and MasterCard control 80% of card transactions; 80% of the interchange fees go to only about ten large banks. This large market share enabled price increases without significant negative competitive effects. Banks were not allowed to compete with one another or negotiate with merchants over interchange rates, and there was no constraint on Visa and MasterCard’s ability to fix the rates at unreasonable levels.
Further, merchants had limited ability to refuse payment by cards and were unable to provide customers with preferential pricing for alternative means of payment. Visa and MasterCard did not allow discrimination against the use of credit/debit cards.