In order to provide merchants a modicum of relief following the Great Recession, Congress passed the Durbin Amendment — legislation that confers upon the Federal Reserve the power to regulate debit card interchange fees and allows merchants to offer discounts to consumers who pay in cash. These changes are designed to lower overall costs for merchants by decreasing the fees they have to pay banks every time a debit card is swiped in their establishments and by stimulating cash purchases, which cost less to process than credit or debit payment methods. Lower merchant costs are expected, in turn, to lead to lower prices facing consumers, and overall retail benefit.
However, according to a CardHub.com study, lowering debit card interchange fees will cost banks between $3.6 billion and $9.1 billion annually. This forecast becomes especially important when viewed within the context of the Durbin Amendment’s three key loopholes: The legislation does not apply to prepaid cards, does not enable merchants to offer discounts within payment types (e.g. discounts for paying with a Visa credit card vs. a MasterCard credit card) and excludes small banks from regulation. These loopholes, in turn, have five main implications that will ultimately result in a restructuring of the credit and debit card markets rather than the benefits intended for merchants and consumers.
First, in order to negate their projected losses, large banks will likely raise the monthly fees and minimum monthly balance requirements for checking accounts while lowering the rewards benefits for debit cards, making them less attractive and useful to consumers overall.
Similarly, banks with less than $10 billion in assets were left unregulated, meaning they do not have to abide by Fed regulations and can offer more attractive debit choices than their larger counterparts. As a result, they will take over debit card market share from larger, regulated banks, leading to the declining prevalence of debit cards that actually provide for merchant gain.
Additionally, since banks can still charge merchants unregulated interchange fees for prepaid card transactions, they are expected to market them as debit card replacements. While prepaid cards have the same utilities as debit cards — with the exception of physical check writing capabilities — their lack of regulation leaves consumers vulnerable to high costs.
The Durbin Amendment also does not allow merchants to offer discounts to customers within payment types, meaning that Visa, for example, is not forced to compete with MasterCard for the cheapest-to-use debit card. In contrast, both merchants and consumers benefit from discounts between payment types (e.g. cash vs. credit vs. debit) because they create competition that drives down overall costs. However the lack of impetus for inter-payment type competition means that prices will remain relatively high and the most robust, consumer-friendly competition landscape possible will not be put in place.
Finally, the aforementioned changes will increase the rewards disparity between credit and debit cards, thereby encouraging credit use. Credit cards had higher interchange fees than debit cards to start and were left unregulated by the legislation. Thus, as consumers shift their spending from debit cards to rewards credit cards in order to take advantage of the better rewards, merchant benefit brought about by the Durbin Amendment will be further diminished.
Ultimately, the Durbin Amendment’s loopholes and the measures that banks are likely to take to mitigate losses will negate the Durbin Amendment’s originally intended purpose. Instead of creating consumer and merchant savings, it will merely restructure the credit and debit markets. Small banks will increase their debit card market share and both prepaid cards and credit cards will gain in popularity, ultimately leaving no one to benefit from this legislation.
Odysseas Papadimitriou is the CEO and founder of Card Hub, an online marketplace for credit card offers.