The Durbin Amendment — the legislative impetus for the Federal Reserve capping debit card interchange fees — was positioned as a boon for small business.
Legislators believed that by limiting the fees banks could charge merchants for debit card transactions, they would effectively lower costs for merchants and maybe even bring about lower prices for consumers as well. But while the controversial nature of this law has been evident from the time it was passed in May 2010 to October 1, 2011, when a roughly 24-cent per transaction cap took effect, we finally have the perspective required to answer the question: Has the Durbin Amendment done anything to reduce the financial burden for small business owners and consumers?
Heartland Payment Systems, the fifth largest payment processor in the U.S., contends that its portfolio of 250,000 merchants has already saved more than $30 million as a result of the Durbin Amendment’s interchange fee cap since it took effect on October 1.
The company also reports that merchants across the country saved an average of $260.24 for every $100,000 in Visa and MasterCard signature debit and credit card purchases they processed during the first two weeks the fee cap was in place.
Unfortunately, we should not expect these savings to last for two reasons: 1) There are more holes in the Durbin Amendment than Swiss cheese and 2) large banks are expected to lose $9.4 billion in interchange revenue annually as a result of this law, which means they are highly motivated to exploit its loopholes. Therefore, even though the cap on debit card transaction fees went into effect several months ago, its repercussions have yet to be fully realized, which is especially problematic when you consider that the Fed can’t do much to correct for unintended consequences without lawmakers first stepping in.
Aside from the fact that debit cards were the only method of payment regulated, the Durbin Amendment only applies to banks with at least $10 billion in assets. This means that there are simply too many unregulated alternatives out there (for example, credit cards, prepaid cards and small bank debit cards) for debit card interchange fee regulation to do much good for merchants. Given that it’s in the best interest of major banks for consumers to use unregulated financial products, and consumers naturally chase the best deals, a restructuring of the banking industry is far more likely than merchants seeing long-lasting savings.
Indeed, we have already seen this occur, as some of the largest banks have eliminated debit card rewards, implemented new monthly checking account fees, improved rewards credit cards, and/or started offering prepaid cards. Not only have these moves served to stop the bleeding in terms of lost fee revenue, but they’ve also made traditional checking accounts relatively less attractive by highlighting cheaper alternatives that can meet the same consumer needs.
You, therefore, have to wonder: Was the Durbin Amendment doomed from the start? Surprisingly, the answer is no. The premise of the law was valid; its implementation was simply off base.
More specifically, the Durbin Amendment failed to create a payment landscape in which banks were incentivized to compete for the business of merchants and consumers. Had merchants been given the power to assess surcharges and offer discounts based on both the payment method and the card network used, there would have been no need for the Federal Reserve to set rigid caps.
In an environment where merchants could charge 2 percent extra if you use an American Express credit card versus a Visa card, for example, consumers would obviously use the method of payment garnering the cheapest price, so a natural downward pressure would be placed on the fees networks and banks charge merchants.
Odysseas Papadimitriou is an entrepreneur who founded the credit card comparison Web site Card Hub in 2008. Prior to that, he was a senior director at Capital One.