After the Durbin Amendment: A new era in debit card transactions

After the Durbin Amendment: A new era in debit card transactions

Merchants have certainly had a lot on their plate lately, including a lousy economy and a slew of new technologies they need to consider to accommodate their short- and long-term growth plans. Now comes another game-changer -- the recently enacted "Durbin Amendment," which was included in the Dodd-Frank Wall Street Reform and Consumer Protection Act that became law in June 2010.

The Durbin Amendment, which faced stiff opposition from the financial services industry, is now cleared and ready for takeoff. Beginning Oct. 1, 2011, U.S. merchants will pay significantly less on debit card swipe fees thanks to the Durbin provision (named after Illinois Sen. Richard Durbin, who sponsored the proposal).

Merchants currently pay 1 to 2 percent per transaction. But beginning in October, debit card interchange fees will be capped at 21 cents per transaction, and merchants will be able to choose the debit network they prefer to process transactions.

The legislation focuses mainly on interchange fees associated with debit cards and will not impact credit card interchange fees. Interchange fees cost merchants approximately $62.75 billion last year, up 29 percent since 2005, according to the Nilson Report, a card payment analytical firm.

So what will the new debit card swipe fee rules mean to merchants, and more importantly, to their bottom lines? And how can retail business owners use the new rules to their full advantage? Let's take a look:

1. Consider incentives.
Under the new swipe fee reform statutes, merchants will have more flexibility in what deals they can offer consumers who pay with debit cards or cash. That's good news for retailers who can use that leverage to earn more cash. But what's your best play? For instance, under the old rules, merchants were forbidden from offering discounts to customers who paid via cash or debit cards. Under the new format, such discounts are allowed. So merchants who offer discounts to customers who pay with debit cards or cash can keep more of the transaction fees in their own pockets.

2. Make the amendment work for you.
Remember, the primary driver for the new law is to help merchants get out from under the shadow of high debit card transaction processing fees. So you need to burrow down and get to the real nitty-gritty of the Durbin amendment. For instance, the fee cap of 21 cents per transaction translates into a decline of 80 percent in debit card transaction fees. But know the new fee structure applies to banks with more than $10 billion in assets. That's why it pays to get to know the new rules. 

3. Steer customers to the lowest provider.
Merchants will have an option on which debit networks they use to handle process transactions. Make that leverage work for you by steering transactions to the lowest-cost provider. Usually that means urging them to use PIN debit cards over signature debit cards. 

There's little doubt that the Durbin amendment changes the debit card landscape for merchants and offers them ample opportunities to reduce interchange fees and add more beef to their bottom lines. The key is getting to know the bills, inside and out and applying that knowledge in a practical and effective way to your retail business.

(Article updated 7-29-2011. Originally published 7-15-2011.) 

See related: Fed pivots on interchange fees; Fighting high card processing fees with store debit cards

Published: July 29,2023