Examining the Federal Reserve Decision on the Durbin Amendment

Examining the Federal Reserve’s Decision on the Durbin Amendment

Included in the Dodd-Frank Wall Street Reform and Consumer Protection Act – which was designed to bring about radical change in the U.S financial system following the financial crisis – was a provision known as the Durbin Amendment that required the Federal Reserve to place a limit on swipe fees, or interchange fees, for debit card transactions.

A last-second addition to the Dodd-Frank by Illinois Senator Dick Durbin, the Durbin Amendment has been a controversial issue of late, as the deadline for the new limits and regulations to take effect approaches.

Federal Reserve Chairman Ben Bernanke stated in late 2010 that he would announce his final decision on the matter in April of 2011. However, heated debate on the topic postponed this pronouncement until June 29th, when the regulations on debit card interchange rates were finally announced.

Originally slated to take effect on July 21st, the new rules will now be implemented on October 1st, 2011.

After originally considering a cap of 12-cents per transaction, the Federal Reserve has decided to place a cap of 21-cents per transaction instead. With a .05% of transaction allowance to help mitigate fraud losses, and a 1-cent per transaction allowance if the issuer complies with specific fraud protection practices.  

These new restrictions will cut down swipe fees by around 45%. For the average debit card transaction, which is around $38.00, the interchange fees will amount to around 24 cents.  

The Federal Reserve has also announced that it will now require credit card companies to allow transactions to be processed on two networks. This will drive competition between transaction processors as merchants are given the option to choose which network to use.

So far, the decision has been met with considerable criticism. While banks are still going to lose substantial revenue from the new regulations, critics believe that Bernanke swayed from his original position of a 12-cent cap due to threats by banks that they would have to compensate for losses by increasing fees on checking accounts and other products.

Consumers are unlikely to notice much in terms of savings due to the new regulations. As it is, the new rules only apply to debit card transactions, and not credit card processing which accounts for 65% of total interchange costs.

Bernanke expects merchants in competitive industries and sectors to pass savings on to their customers. Those who have a strangle hold or niche in their industry are more likely to pocket the extra cash.

Consumers will, however, notice that banking will become more expensive as banks compensate for losses. Consumers can expect banks to push incentives to switch from debit cards to credit cards. Those who rely heavily on their checking accounts, and those who struggle to make monthly minimum balances or payments will be the hardest hit.

So who will benefit? With the debit card transaction fee cap set to lower cap fees by 44%, the winner will presumably be merchants, but even that is a little unclear.  In order for merchants to recognize the reduction in interchange costs they will either need to be on an interchange plus pricing plan or some other program, such as split debit and credit, which allows them to take advantage of the new, lower, debit transaction fees.


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