The Durbin Amendment to the Wall Street Reform & Consumer Protection Act granted merchants and regulators certain new powers in respect to credit card transactions while also capping debit card interchange fees – what merchants pay banks when their cards are used as payment – at $0.21 + 0.05% and an additional $0.01 for costs associated with fraud prevention. This cap on so-called swipe fees – which is costing banks $8.4 billion in annual revenue, according to WalletHub research – was supposedly designed to lower costs for consumers by decreasing the financial burden on merchants. However, all it really has done – as you’ll see below – is cause a major restructuring of the payments landscape, actually hurting our wallets.
The Durbin Amendment is known primarily for killing debit card rewards, prompting the rise of prepaid cards and stirring up a lot of legal and legislative hullabaloo. While those things are all certainly change, they are all simply ramifications of a law whose core can be summarized in four major provisions.
- Merchants Can Now Set Credit Minimums: Merchants are now free to implement minimum purchase amounts as high as $10 for credit card transactions in order to avoid losing money on small transactions.
- Government Agencies & Universities Can Set Credit Maximums: Government agencies and institutions of higher education are entitled to implement maximum purchase amounts for credit card transactions. This is to avoid allowing people to shift significant payment liability – such as what might result from taxes or tuition – to an unsecured payment vehicle.
- No Surcharges, But Discounts are Allowed: Merchants can’t charge you more if you use a certain payment method, but they are allowed to give discounts to customers who use their payment (i.e. credit card, debit card, cash, etc.) of choice. They cannot, however, provide larger discounts to one card network versus another. This affords merchants more control in steering customers toward using the type of payment method that is least costly to them.
- Fed Interchange Fee Regulation: The Durbin Amendment conferred upon the Federal Reserve the right to ensure that debit card interchange fees are “reasonable and proportional” to the costs that banks incur in processing these transactions. This resulted in the Fed capping debit card swipe fees at roughly $0.21.
Flawed From the Start?
One of the most maddening things about the Durbin Amendment is that the negative ramifications of swipe fee regulation were both foreseeable and wholly unnecessary, according to Professor Todd Zywicki, George Mason University Foundation Professor of Law at the George Mason University School of Law and editor of the Supreme Court Economic Review, and Dr. William Longbrake, the executive in residence at the Center for Financial Policy at the University of Maryland’s Robert H. Smith School of Business.
“My biggest problem was that it was entirely predictable, that what has happened was exactly what was going to happen,” Zywicki said. “Price controls don’t work in a competitive market.” And there were no signs that the debit card market was not already functioning properly or unduly harming any of the parties involved (i.e. banks, merchants, and consumers), according to Longbrake, who added that similar price controls were instituted in Australia and did not result in any apparent price decrease for consumers.
Indeed, there were many who decried the Durbin Amendment prior to its passage, pointing to the fact that it had too many loopholes to possibly lower costs for either merchants or consumers in the long term. You see, debit cards from banks with at least $10 billion in assets are the only financial products being regulated; banks can still name their price for credit card, prepaid card, and small-bank debit card swipe fees.
Plus, do you really think banks would just be content losing $8.06 billion in annual revenue, which is what WalletHub reports have pegged their Durbin losses at? Of course not, and they’ve made up for this evaporated revenue stream by increasing checking account fees, eliminating debit card rewards programs, and encouraging consumer use of unregulated products like credit cards and prepaid cards.
Why the Law Initially Passed
Both Zywicki and Longbrake agree that the Durbin Amendment was basically a product of lobbying and political compromise. “It really was sort of a food fight, if I can call it that, between the banks and the merchants, with the consumers on the sideline,” said Longbrake.
Banks were politically vulnerable, both said, and merchants were adept at capitalizing on this weakness with effective lobbying. While representatives for the nation’s big retailers (think K-Mart, Wall-Mart, Target and Best Buy) were busy extolling the virtues of capping swipe fees to politicians, “the banks were asleep at the switch, basically,” said Longbrake. They simply didn’t do a good enough job making sure that decision makers were aware of the flaws in the plan, and that allowed the widespread influence of retailers to take the day.
“Every congressman has businesses in their district, and the big box retailers really lobbied hard for this,” said Zywicki, who noted that the Durbin Amendment will save large merchants tens of millions in interchange fees annually. “I think a lot of politicians, especially republicans, are having buyer’s remorse once they’re finding out what they voted for.”
Legislative Changes to Come?
Well, the Durbin Amendment would be repealed in a perfect world, according to Longbrake, but he and Zywicki agree that is unlikely. The merchants simply have too much clout. At least swipe fee regulation won’t be extended to credit cards and other unregulated financial products. Politicians don’t have the stomach to expand the law’s scope.
We’re therefore basically stuck with what Zywicki calls the “de facto destruction of debit cards in America, which has probably been the most popular financial innovation in the past century.”
The Rise of Prepaid Cards
Prepaid cards were an obvious choice for large banks looking to replace debit cards in the hierarchy of debit-based products. Not only were they left unregulated by the Durbin Amendment, making them more profitable than debit cards, but they also offered consumers nearly all of the same utilities. With most prepaid cards, you can load your paycheck via direct deposit, pay bills online, withdraw cash from ATMs, and make online and in-store purchases. The only thing you’ll miss out on is an actual checkbook, which might not really matter given that you can send checks to anyone using the online bill pay service.
It’s therefore no surprise that we’ve seen an infusion of both funds and attention into the prepaid card market since the cap on swipe fees was instituted on October 31, 2011. Not only have celebrities like Lil Wayne and Suze Orman developed their own prepaid cards in the last six months, but major banks like Chase and Capital One have also recently launched their first prepaid card offerings, and more are expected to follow suit moving forward. Marketers are even using prepaid cards to garner increased attention for popular online games.
Ultimately, this will be the Durbin Amendment’s overarching legacy, instead of any financial assistance for merchants or consumers.