What is the Durbin Amendment?

What is the Durbin Amendment?   Understanding this law, part of the Dodd-Frank Act, is helpful if you’re involved with any business taking debit cards for payment as well as for many in fintech or the payments industry.   Whether or not the law has helped make fees more reasonable is an ongoing debate.

Whenever a debit card is used the Durbin Amendment comes into play.    This amendment, sponsored by Senator Dick Durbin, is part of the Dodd-Frank law which drastically reduced fees businesses paid to banks whenever a debit card is used.     The idea was to save consumers money by reducing costs for retailers ideally leading to lower prices for goods and services.      However, banks and financial institutions receiving these fees initially lost billions in revenue that led to changes to recoup that money.

When the rules took effect in 2011, big banks began increasing other fees and reducing perks such as debit card rewards programs and free checking accounts.    Minimum balance requirements for bank accounts increased, monthly fees increased,  and NSF fees and account inactivity fees also increased.     Banks also cut rewards programs on debit cards, and instead added more rewards programs to credit card products that are not affected by the Durbin Amendment.

Opponents of the Durbin Amendment have said it has hurt consumers overall and hasn’t resulted in lower retail prices.   A study funded by the International Center for Law and Economics at George Mason University supported this idea.   But advocates of the law, including retail trade groups such as the Merchant Payments Coalition say prices did drop and they have continually fought for more swipe-fee changes.

So how exactly does the law affect retailers?

Some are paying less in debit card usage fees.  The maximum fees range from 21 cents to about 24 cents, depending on the size of the transaction and the bank issuing the card.  Before the amendment, retailers paid an average of 44 cents for a typical debit card transaction of around $40.  The Durbin rules meant that for that typical purchase, the maximum fee would be about 24 cents, almost half the cost from before the law took effect.

However,  card brands and banks quickly factored in the loss in revenue and adjusted policies.   Before the amendment, many banks and card issuers based transaction fees on a variable percentage of the purchase value, so merchants paid smaller fees on smaller purchases and larger fees on larger purchases.   Then Visa and Mastercard began charging the maximum amount for smaller transactions.  So, for example, instead of paying a 6-cent interchange fee for a $3.50 charge for coffee and a doughnut, a shop owner suddenly faced a fee of 21 cents for the same bill.

It remains an open debate whether or not the Durbin Amendment has been helpful overall.     Since 2010, many legal battles have taken place attempting to have the rule removed with banks and card brands siting the high cost of providing merchant services as well as preference in how fees were handled pre-Durbin.     There are as many proponents of the amendment, many of which are still pushing to see further adjustments to fee structures.

If you’d like to read a full paper covering the Durbin Amendment from the University of Pennsylvania Carey Law School click here.