Current Issues: Durbin Amendment

Current Issues: Durbin Amendment

The Dodd-Frank Act was established in response to the recent financial crisis, it seeks to protect consumers and reduce systematic risk by "promoting the financial stability of the United States by improving accountability and transparency in the financial system" . As part of the Dodd-Frank Act the "Durbin Amendment" (Section 920 of the Dodd-Frank Act) was created, according to the U.S. Senate "to ensure that the fees that small businesses and other entities are charged for accepting debit cards are reasonable and proportional to the costs incurred, and to limit payment card networks from imposing anti-competitive restrictions on small businesses and other entities that accept payment cards ." To better regulate the amount debit card issuers can charge to merchants for processing such transactions it seeks to improve competition by setting a price cap. Consequently, such debit interchange fees were lowered by almost 50% to about 21 cents from about 44 cents. It seems that big merchants, those that take debit card as payment for the purchase of their good like Wal-Mart or Walgreens, will be the beneficiaries and not so much consumers.

The Board of Governors of the Federal Reserve issued two alternatives seeking to regulate transaction fees and making such market more competitive in order to provide better service. In Alternative 1, the Board of Governors would set price cap levels of interchange fees that deems reasonable; 7 cents per transaction would be allowed without the need to justify cost, otherwise, 12 cents per transaction would be allowed as long as costs can be justified. In Alternative 2, there would be a 12 cent per transaction cap .

In 2011, the Federal Reserve issued final rules establishing standards as required by the Durbin amendment, before determining the standards the Federal Reserve allowed all parties involved in the debit card transaction fees, including consumer representatives, to comment on the matter. After receiving 11,570 comments the Board adopted a modified version of Alternative 2, setting a 21 cent cap per transaction and the option of adding 5 basis point of the transaction value to adjust for fraud-prevention. In addition issuers are required to process two non-affiliated networks per transaction in order to promote competition. Banks will give up 23 cents per transaction which equals what merchants would save, and transferring those saving to consumers. This Final rule went in to effect on October 1, 2011, however, this rule will not affect those institutions with less than $10 billion worth of assets.

One of the pros of the Durbin amendment is that it reduces the amount merchants have to pay to debit card issuers by 23 cents after setting a cap of 21 cents, before this new law was implemented card issuers had to pay an average of 44 cents per transaction, assuming the average debit card transaction in America was $38, according to the Federal Reserve analysis . In theory merchants would be able to offer discounts or better prices to its customers, which was the basis for this new act. In theory merchants such as Wal-Mart, Walgreens and Jewel, which are giant retail stores, would see big savings from the reduction of transaction fees and those saving would eventually have to transfer to costumers.

However, considering that there are small businesses that accept debit card purchases of