VMS-Washington – What is the Durbin Amendment?

VMS-Washington – What is the Durbin Amendment?

An Overview of the Durbin Amendment

The Durbin Amendment is an addendum to the Dodd-Frank Financial Reform and Consumer Protection Act passed by Congress in 2010. Its namesake, Senator Richard Durbin from Illinois, wrote the plan to expand Federal Reserve powers for setting interchange fees related to debit card transaction processing. In setting the fees, the ultimate goal is spur economic growth with lower fees. Theoretically, retailers could lower prices on consumer goods with the savings on paying high fees to big banks. Lower prices might help to increase consumer spending.

The rules of the Durbin Amendment would cap the interchange fee for debit card transactions. Generally, interchange fees are charged by retailers for each payment accepted with a debit card or credit card.Before the passage of this amendment, the average charge from banks to retailers per transaction was 44 cents. According to the Federal Reserve, banks collected nearly $16 billion annually on these fees to cover fraud prevention and administrative costs. Beginning October 2011 – when the new law goes into effect – the charge will cap at 12 cents.

For retailers, this appears to be an advantage in reducing the amount of bank charges. However, some note that banks will look for alternatives to the revenue loss. Consumers could end up paying the price, literally and figuratively, for the lost revenue.

Additional Provisions in the Durbin Amendment

The Durbin Amendment only affects banks that have less than $10 billion in assets.

Retailers have a choice in selecting a debit network service to process the transactions. Before the new law, retailers could only use the STAR network to process Visa transactions. This was required even if other merchants charged less.

Retailers can give discounts to consumers who pay with a debit card or in cash. Merchant agreements for both Visa and MasterCard currently ban this practice to encourage credit card use.

Problems with the Durbin Amendment

Critics observe the looming problems with the Durbin Amendment, despite its positive provisions.

Because credit cards remain unregulated, banks may choose to increase incentives such as rebates and reward points to entice more spending with credit cards. Consumers may see an advantage to using credit cards versus a debit card to earn the incentives.

VMS-Washington – What is the Durbin Amendment?

Currently there there are restrictions on banks for requiring minimum purchases with debit cards, however fears do exist that with this new legislation that many banks may try and change this. For example, banks could decide to cap debit card purchases at $100, limiting big ticket purchases. Instead, consumers will be forced to use a credit card, prepaid debit card or cash. Purchases are limited for consumers who have bad credit and no credit card.

Smaller banks not directly affected by the Durbin Amendment could suffer revenue losses. Market forces might require small banks to lower rates to remain competitive.

Another problem is banks may transfer the fee to consumers to offset revenue losses. One way this could occur is by changing the terms for free checking accounts. It is possible that banking competition will prevent such changes.

How the Durbin Amendment Impacts Small Businesses

For all of its intentions to improve economic activity, this legislation will impact small businesses in several ways.

Most small businesses pay more to provide discounts than for debit interchange fees. This leaves most at the mercy of a pricing strategy. A tiered system with a merchant service company could cost more.

Small businesses could realize very little in actual savings proposed by the Durbin Amendment. For example, merchant services may have a coded system that equates to other fees such as down-grades and hidden mark-ups.

In essence, small businesses may not see any savings initially because of blended contract agreements. The net effect is that consumers who purchase from these businesses will not see any savings. Small businesses that currently do not accept debit card payments would not see any savings.

If banks raise banking fees, they may include small business checking accounts. Nearly 15 million small businesses have active checking accounts. It is estimated that small businesses could pay as much as $4.8 billion in higher fees during the two years after the Durbin Amendment is implemented.

Many small businesses will need to analyze their debit card transactions. This could help to determine whether savings is possible with their current provider, or if switching to one with lower fees is worthwhile. What works for one small business may not benefit another based on the payment card consumers use.

Conclusion

The Durbin Amendment was passed to increase economic activity among consumers and small businesses. The interchange fees enforced by the Federal Reserve could add more cost than savings to both groups. Market competition may drive banks to shift the lost revenue onto small businesses and consumers.

VMS-Washington – What is the Durbin Amendment?

Larger businesses may benefit more from the reduced interchange fees and have more flexibility to pass those savings onto consumers. However, the law allows small businesses to select its merchant service for transactions. This provides more options in providing a merchant service provider with reasonable fees.

A big key here is that it still falls the each small business to ensure they are saving money with the new legislation. Make sure when you call your current credit card merchant account provider or the one you are thinking about signing with, that they are aware of Durbin and have adjusted their pricing to pass on these savings. If the representative can not quickly speak to how they adjusted their prices, or worse seems confused as to what the Durbin Amendment is, then it likely means you should find a different merchant service provider to work with.

Due to the overwhelming replies and inquiries VMS-Washington wants to help your business out by giving you rock bottom rates for your processing.  We also can help your business by giving you great rates for unsecured business loans with an 90% approval rate for start-ups and existing businesses.  Call or email us if you want to know more.

Michael Roberts

VMS-Washignton
www.vms-washington.com
washignton@valuedmerchants.com
(800) 531.8575 ext. 697

VMS-Washington – Banks React to Durbin Amendment

When the Durbin Amendment regulating interchange fees on debit card transactions took effect October 1, it appeared that merchants could accrue some cost savings on debit card transactions and perhaps leverage their savings by encouraging customers to use debit cards in lieu of credit cards, which have higher merchant fees. However, even before Durbin took effect, large banks warned that they were not going to absorb lost revenues from reduced interchange rates. The reduced rate is expected to cost banks about $6.6 billion a year in revenue, according to Javelin Strategy and Research.

In response to the Durbin amendment, many banks terminated rewards programs associated with debit cards. Over the past few months many of them announced tests of increased fees for use of debit cards or simply said they were raising fees or actually increased them. For instance, Wells Fargo and J.P. Morgan Chase announced tests of a $3 monthly fee for debit card use. Southeastern regional bank SunTrust has been charging some customers $5 a month on debit card purchases since June. In September, Bank of America announced a $5 monthly fee for making purchases with a debit card — starting next year. Several consumer polls suggested that the fees would most likely dampen the use of debit cards for purchases.

The Banks Reconsider

Many big-bank customers apparently moved accounts to smaller local banks or credit unions. President Obama and Senator Richard Durbin (D., Ill.) — who wrote the provision that reduced merchant debit card fees — criticized the banks. Over the past week all of the banks that planned to implement the fees have retreated from that position. Wells Fargo and J.P. Morgan Chase dropped their tests. SunTrust said it is dropping its $5 monthly debit card charge and will refund the fee to customers who have paid it. Bank of America issued a statement saying it is dropping its plan to charge customers $5 a month. “We have listened to our customers very closely over the last few weeks and recognize their concern with our proposed debit usage fee,” said David Darnell, Bank of America co-chief operating officer.

Is This A Win for Consumers?

All of this does not necessarily help consumers, says Odysseas Papadimitriou, the chief executive of credit card search tool provider CardHub.com. “Banks may be more hesitant to introduce new debit fees now. But they will still have to find ways to increase charges and drive profits,” he told Smart Money, the financial magazine. “The net result is a status quo for consumers. They’re no worse or better off.”

In contrast, Katherine Lugar, executive vice president of public affairs for Retail Industry Leaders Association, issued a statement saying, “Today’s news is proof-positive that consumers remain swipe fee reform’s biggest winners. Bank of America and its big-bank peers are no longer free to fleece merchants and consumers at will. This outcome is just what consumers deserve, what reform advocates predicted and what we will fight to extend to the credit card market.”

To gain revenue banks will likely turn to services where fees are already in place. Customers may see increased checking account charges, inactivity fees on debit cards that aren’t used, and higher fees for bounced checks. ATM fees may increase and receiving a paper statement may cost customers. Free checking will likely disappear altogether. In 2011 only 45 percent of non-interest bearing checking accounts are free, a drop from 65 percent in 2010, according to a survey by Bankrate.com.

“If the banks’ revenue streams are cut in one area, they’ll find a different area to make that up,” Bill Hardekopf of credit card comparison site Lowcards.com told US News & World Report. “New fees could be more subtle, more under-the-radar.”

Effect on Merchants

Online merchants will be in the same position that existed when the Durbin Amendment went into effect on October 1. As we explained at “Understanding the New ‘Durbin’ Debit Card Rates; Exec Explains” and “Credit Card Processing: ‘Interchange-Plus’ Pricing Not Necessarily Fair,” merchants should monitor what their merchant account providers charge them, and look for providers that pass the Durbin debit-card interchange savings to them. Merchants, in turn, can keep the savings from reduced rates themselves or pass them through to their customers via lower prices. They can also offer incentives to encourage customers to use debit cards instead of credit cards.

It is unlikely that banks will be able to impose new debit card fees on merchants. Instead they will focus on their checking account and credit card customers. Banks may raise credit card fees or interest rates for their credit card holders, which could make using debit cards for shopping even more attractive.

Due to the overwhelming replies and inquiries VMS-Washington wants to help your business out by giving you rock bottom rates for your processing.  We also can help your business by giving you great rates for unsecured business loans with an 90% approval rate for start-ups and existing businesses.  Call or email us if you want to know more.

Michael Roberts

VMS-Washignton
www.vms-washington.com
washignton@valuedmerchants.com
(800) 531.8575 ext. 697