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Understanding the Durbin Amendment and its Impact on the Debit and Prepaid Card Industry

Regulation - Senator Durbin Amendment #3989

On July 21st, 2010 the “Restoring American Financial Stability Act of 2010” was signed. It is also known as the Dodd-Frank Wall Street Reform and Consumer Protection Act. The Durbin Amendment which is part of that bill and provides the Federal Reserve final say on whether or not debit card interchange fees proposed by Visa/Mastercard are reasonable. The Federal Reserve has 9 months to determine what is reasonable and proportional (for implementation within a year). Banks with assets under $10 billion are exempt from the regulation. Details are noted below.

Purpose of Law

  • Sen. Durbin's amendment would direct the Fed to issue rules to ensure that debit interchange fees are reasonable and proportional to the processing costs incurred. Visa and MasterCard currently charge debit interchange fees of around 1-2% of the transaction amount. These fees are far higher than the actual cost of processing debit transactions, and they mean that small businesses and merchants always get shortchanged when they accept a debit card for a sale.
  • Sen. Durbin's amendment also prevents card networks like Visa and MasterCard from penalizing sellers for offering discounts to customers. The amendment would allow sellers to offer discounts for customers to use competing card networks and for customers to pay by cash, check or debit card. The amendment would also allow sellers to choose to decline credit cards for small dollar purchases (because interchange fees often exceed profits on such sales).
  • Sen. Durbin's amendment does not affect credit card interchange fees. The amendment's reasonable fee requirement only applies to debit cards.
  • The Durbin reasonable debit fee requirement exempts banks and credit unions with assets under $10 billion (this includes 99% of all banks and credit unions). Under Sen. Durbin's amendment, the requirement that debit fees be reasonable does not apply to debit cards issued by institutions with assets under $10 billion. This means that Visa and MasterCard can continue to set the same debit interchange rates that they do today for small banks and credit unions. Those institutions would not lose any interchange revenue that they currently receive.
  • Sen. Durbin's amendment would not enable merchants to discriminate against debit cards issued by small banks and credit unions. Visa and MasterCard contractually require merchants to accept all cards within their networks, and the amendment does not change that requirement.
  • Sen. Durbin's amendment would not have the Federal Reserve set interchange prices. Under Sen. Durbin's amendment the Fed would not set debit interchange prices. Instead the Fed would oversee the debit interchange fees set by card networks to ensure that they are "reasonable and proportional" to cost. This is the same "reasonable and proportional" standard that Congress directed the Fed to use to oversee consumer credit card fees in the 2009 Credit CARD Act.

Possible market impacts

  • Merchants - will set minimum purchase amounts for consumers to use cards, may offer cash discounts or charge a surcharge to use a credit card and will see lower processing costs for debit cards if the Fed's say current rates are too high.
  • Banks - have billions in revenue at stake that may be lost. If this happens chances are consumers will see an uptick in other fees - checking accounts, annual credit and even debit card fees, etc. Rewards programs could be eliminated.
  • Buyers/Consumers - may lose the ability to make low end purchases with a debit card (under $10? under $20?), will see an increase in overall banking fees, credit could get tighter if banks tighten reins because their capital base is squeezed, more limited payment options.
  • Community Banks and Credit Unions - not included in the regulation if revenues are under $10 billion, were not pro its passage. They worry that merchants will find a way to not accept their cards at the POS because of the higher interchange costs and they will not be competitive in issuing debit cards - may lose customers.

Other facts

  • Annual US Debit interchange revenue is roughly $15 billion, most of which is earned by the big issuers. Of the top 30 debit and prepay issuers only Metapay and Bancorp have less than $10 billion of assets and are therefore exempt from interchange price controls.
  • Prepaid and government-program debit cards will both be exempt from interchange regulation.
  • Signature debit fraud costs run 7 to 8 basis points and pin debit 1 basis point.
  • Fraud prevention costs run issuers 6 to 7 basis points
  • Interchange fees may be reduced as much as 90%
  • Banks will not be able to issue debit cards that only bear a specific association’s logo. The intent is to give merchants more options, the idea being that they will choose to route transactions over the cheapest network.

Potential opportunities for financial institutions

  • If banks will begin to charge fees for checking/debit cards, they may want to include an enhancement as a retention tool.
  • CBSI could help issuers reward customers in multiple services with the bank (total customer solution) – i.e. provide rewards/benefits to customers based on relationship with bank – i.e. credit, debit, deposit account.
  • Banks could offer traditional fee based packages which generate fee income.
  • CBSI could explore the development of an insurance program to help mitigate fraud prevention costs on debit transactions.
  • Contact Lisa Bonelli at CBSI for more information at 914-381-5353.

Resources:

  • US Senator Dick Durbin website
  • Article posted on XBS Global website
  • American banker