Five months in, how is the Durbin Amendment affecting banks, merchants and consumers?

Five months in, how is the Durbin Amendment affecting banks, merchants and consumers?

The Durbin Amendment, which capped the amount most banks could charge merchants in debit card transaction fees, has been in effect for five months.

Before it took effect, merchants, consumers and issuers alike had questions. How much money would debit card issuers lose? Would the amendment actually save all businesses money? And how would consumers be affected?

Here's how the Durbin Amendment is playing out five months in.

Durbin defined
The Durbin Amendment bears the name of Senator Dick Durbin, who sponsored it. It's a legislative appendage to the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.

The amendment caps the amount merchants pay in debit swipe fees -- the fees charged each time a customer uses a debit card. Before the amendment, businesses paid swipe fees that were a certain percentage (generally 1 to 2 percent) of a purchase. Now, they pay a maximum of 24 cents per transaction.

Not all merchants are reaping benefits
Paying a maximum of 24 cents is a boon for merchants who are selling big-ticket items. For example, a 2 percent transaction fee on a $500 purse would cost the merchant $10 -- a lot more than 24 cents.

Yet businesses that specialize in small-ticket purchases are hurting under Durbin, according to a January 2012 report from Javelin Strategy and Research. In the past, the major credit card networks (like Visa and MasterCard) put transactions under $15 on a separate fee schedule, charging around 6 cents (instead of 1or 2 percent). In the wake of the Durbin Amendment, however, these networks have set all fees to the maximum amount allowed (up to 24 cents).

In other words, some businesses are getting charged a significant chunk of change when a customer buys, for example, a $5 value meal. And that, some experts fear, could lead businesses to raise their prices to make up for that loss.

Banks, card networks losing money
Banks and card networks (like MasterCard and Visa) traditionally shared the money earned from swipe fees. So they stand to lose money because of Durbin. And Visa has indeed seen a slow-down in U.S. debit business in the months since the amendment went into effect, according to PaymentsSource.

Financial institutions aren't likely to sulk quietly while their profits diminish. In fact, some industry experts are concerned that financial institutions will find other ways to creatively and aggressively recoup lost profits -- such as fees charged to debit card holders. What's more, the Durbin Amendment does not regulate credit cards. Both Javelin and PaymentsSource suspect that banks and card networks will therefore steer consumers away from debit and toward credit.

Customers caught in the middle?
For some businesses, banks' losses are their gain. Many businesses are seeing savings as a result of the capped fees -- about $260 per every $100,000 in Visa and MasterCard purchases, according to numbers from payment processor Heartland Payment Systems cited by the Washington Post. Those businesses therefore have every incentive to encourage their customers to use debit -- and offer them rewards (like discounts) for doing so. But don't forget about those small-ticket merchants that are losing money on the capped fees. They'll most likely be pushing cash, according to Javelin.

So customers might  soon find themselves in the middle of a game of tug of war. The bank is pushing credit (and charging extra for debit), one store is pushing debit (and offering incentives) and yet another store is pushing cash. As a result, according to Javelin, consumers will find themselves facing a "bewildering onslaught of mixed messages" about which payment method to use.

Published: March 8,2023