Durbin Amendment Sparks a Classic Bipartisan Power Struggle

Durbin Amendment Sparks a Classic Bipartisan Power Struggle

The effects of the Durbin Amendment cap on debit card transaction fees, which went into effect on October 1st, are already being felt. Democrats and Republicans are responding by quickly falling in line with their traditional positions on the core arguments, while some banks are finding new ways to nickel and dime consumers.

The cap on debit interchange fees was intended to lower costs to better reflect the inherently lower risk of debit card transactions.  It was also intended to open up competition in debit card networks. Before the Durbin laws were passed, card issuers only processed transactions on one network and merchants had no ability to choose a lower cost option. As part of the new law, cards from banks with over $10 billion in assets now have to give merchants a choice of at least two networks for processing their transactions. Costs for debit card transactions from these banks is now capped at 21 cents, plus 5 basis points and an additional 1 cent for fraud prevention costs. Prior to the Durbin Amendment these costs were typically around 44 cents for a similar transaction.

Of course, major financial institutions are the ones who are most impacted by this change. They are not going to take losses lightly. Many industry experts predicted the end of free checking, and Bank of America recently announced, to much uproar, added fees for credit card users and a $5 a month fee for all debit cards, as a way to mitigate losses. Wells Fargo and Chase announced that they were not adding such fees, so it is yet to be seen how the banks will adjust to the decrease in revenue.

Republicans are already lunging at the Durbin Amendment’s neck, arguing that it was well documented that the effects could be catastrophic for consumers. Republican Representative Jason Chaffetz of Utah announced that he is co-sponsoring a bill to repeal the Durbin Amendment, arguing that the provisions increase the cost of doing business for everybody.

Democratic Senators Brad Miller and Dick Durbin himself are fighting back. Miller plans to introduce a bill that would expedite the process of changing banks for consumers. With lengthy forms to fill out, and processes like electronic billing, autopay and direct deposit to roll over, changing banks is typically very tedious. Miller hopes to make these individual banking options transfer easily from bank to bank.

By creating a system for consumers to change banks effortlessly, Miller hopes that consumers will be more inclined to shop around for rates and perks, thus sparking competition amongst banks and adding pressure for banks to lower their fees.

Miller had been studying his idea for over a year, but chose to announce his plan after Bank of America announced the $5 dollar monthly fee for debit cards.

Durbin is taking a much more blunt and controversial route. After Bank of America essentially blamed him for the $5-a-month fee they are assessing to all their debit cardholders, Durbin began urging unsatisfied BoA customers to simply look for a debit card that does not have the fee.

Durbin also admitted that he would probably back Miller’s initiative once he sees the language, claiming that his goal is to find a way to create real competition in banking. He also believes that competition, not regulation, is what is needed in order to enact real change in the financial system.

Despite all the uncertainty and turmoil, many small businesses are already seeing benefits from the Durbin Regulations. The Merchant Account Acquiring business is incredibly competitive. Whenever the costs, in this case debit Interchange, are significantly reduced in a competitive industry, capitalism dictates that these lower costs will eventually be passed along to the consumer.  Acquirers are already offering savings, some simply because their pricing is based on the actual interchange costs, and some because they want to take advantage of the lower costs to make more sales.

The same will happen on the banking side.  Bank of America has every right to charge a fee for checking accounts but other institutions will choose to compete by continuing to offer free checking or other attractive services to try and steal business.  What remains to be seen is if any of these lower costs will be passed along to consumers.

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