Revisiting the Durbin Amendment and its impact on debit card payment pricing in the United States
2023 marks the 12th anniversary of the enactment of the Durbin Amendment in the United States. The Amendment — a part of the Dodd-Frank Wall Street Reform and Consumer Protection Act — caps the interchange fees charged to merchants accepting debit card payments from consumers in the United States using debit cards issued by banks with over $10 billion in assets.
The intention of the lawmakers who supported the bill, including its lead sponsor, Senator Richard Durbin, was to lower interchange fees charged by the card networks so that merchants could pass these costs down to consumers. Senator Durbin argued that interchange fees bore no relationship to the actual cost of the transaction and that they unfairly cost merchants, and thus their consumers, as much as $15 billion a year in what he claimed were disproportionate and unfair fees.
In this post, we look back at how the Durbin Amendment came to be, its impact on payments in the United States, and why merchants need to get have visibility into their payment fees.
Read more about the regulatory road map for the year ahead.
What is the Durbin Amendment?
The Durbin Amendment directs the Federal Reserve Board to regulate debit card interchange fees so that they are “reasonable and proportional to the cost incurred by the issuer with respect to the transaction.”
In practice, this means the interchange fees set by the card schemes and collected by issuing banks in the United States are capped at $0.22 per transaction and five basis points multiplied by the value of the transaction. An upward adjustment of no more than $0.01 can be applied should the issuer provide certain fraud protection facilities.
It’s important to note that these rules only apply to debit card transactions where the card is issued by banks with over $10 billion in assets. Issuing banks with assets of less than $10 billion are exempt from the debit card interchange fee standards. Credit card transactions also fall outside the scope of the Amendment.
In addition to the cap on fees, the Durbin Amendment also placed a requirement on all issuing banks to ensure all in-person transactions made with their debit cards can be processed by at least two different networks. This is now being expanded to online debit card transactions.
Understanding the impact of the Durbin Amendment
The Durbin Amendment remains a contentious topic. On one side, you have its proponents who believe that it’s achieved its objective of lowering costs for businesses, thus keeping costs lower for consumers.
And this argument is supported by the fact the average interchange fees for merchants in the United States may range from anywhere $0.21 to about $0.24. Before the Durbin Amendment, merchants paid $0.44 on average for a typical debit card transaction. In total, these savings equate to billions of dollars a year.
On the other side, you have those who claim it’s had a negative impact and increased costs for businesses and consumers alike. The argument is that before the introduction of the Amendment, most issuers would apply a variable fee structure in line with the purchase size. This meant that merchants paid smaller fees on low-value purchases, like a cup of coffee. However, after the introduction of the Durbin Amendment, the schemes abandoned this pricing system. Instead, they applied the maximum interchange fee permitted no matter the size of the transaction, thus raising the fees merchants paid on transactions below a certain value.
Why merchants need visibility over their payment costs
Interchange pricing continues to be a topic of discussion, both in the United States and around the world. And, as is often the case, there is no simple answer to the question of how effective regulations capping interchange fees are. Interchange fees are a very complex topic, and there are many variables at play that determine whether merchants see these rules as benefits or drawbacks.
What is certain is that merchants need a granular understanding of their payment fees. This goes beyond just interchange fees and includes getting a view into all the total mix of changes that occur every time they accept a card payment from their customers.
And this is something that many merchants lack at present. The research we concluded in partnership with Oxford Economics in 2020 found that 48% of merchants do not receive a detailed breakdown of their payment costs from their payment service providers (PSP). This is clearly a big issue. Without this insight, there is little chance for merchants to understand whether or not they’re optimizing their payment costs or what they can do to drive down costs.
How to unlock payment pricing insights
Those merchants often in the dark are those that work with PSPs that primarily offer blended pricing arrangements. These arrangements see PSPs take interchange rates, card associations fees, processor fees, and gateway fees are combined and charged to merchants as a lump sum.
And while this model can benefit start-ups and SMEs without the time and resources to investigate and reconcile card processing and interchange rates, blended pricing generally makes less sense the more sophisticated a business becomes. That's because blended pricing arrangements give merchants little to no visibility into how their payments are priced, meaning they're not sure where the costs come from and whether they can take steps to reduce the costs of their payments.
That’s where switching to an Interchange++ or ‘pass-through’ pricing model can begin solving this issue. This pricing model gives merchants more transparency into the fees they pay, empowering them to see what they pay and who they pay at every stage of the transaction. Interchange++ will also allow merchants to realize the pricing benefits of any optimizations they make — such as B2B companies providing transaction-level data that enables them to qualify for level two and three interchange rates.
Turning data into insight
The Durbin Amendment certainly put payment pricing on the minds of merchants operating in the United States. Choosing to use a PSP that offers interchange++ pricing can go a long way to helping merchants understand the impact it and other regulations have on their payments pricing.
However, for merchants to get complete control over their payment fees, they need to work with a PSP that serves that data up in a way that provides genuine insights. That could be through a customized dashboard that provides them with the information they care about. Or it could be by sending payments data into other reporting systems so merchants can see the impact of payments, both positive and negative, holistically across the enterprise.
See how Checkout.com provides merchants with the payments data they need to make smarter decisions faster and unlock more revenue.
What does the future hold for the Durbin Amendment?
Ever since the Durbin Amendment passed there have been calls to repeal it by financial institutions who feel that the caps benefit merchants at their expense.
The most notable attempt came in 2017, when plans to remove limits on fees were included in the Republican’s Financial Choice Act. Ultimately, House Republicans decided to omit the repeal from the legislation in order to allow it to pass through Congress.
However, debate over the Durbin Amendment continues. The repeal side argues that it represents a bad deal for consumers, because retailers are not passing on their interchange savings and because, due to lower interchange income, banks have stopped offering debit reward programs. Additionally, they argue, the cap actually increases costs for small businesses with low average sales.
On the pro-Durbin side, many medium to large retailers and industry groups say that interchange costs would rise without regulation, and that those costs would be passed onto consumers. They also argue that the amendment helps to fight the monopoly of large card networks.
What is the Credit Card Competition Act of 2022?
The Credit Card Competition Act is a proposed expansion of the Durbin Amendment, sometimes referred to as the Durbin Amendment 2.0.
If successful, the bill would boost competition and choice in the credit card network market (according to its advocates) by ensuring that large credit card-issuing banks have to offer small businesses at least two network options for the processing of electronic credit card transactions. Essentially an expansion of the rules that have been introduced for debit cards. Durbin and his supporters claim that it would also help innovators gain an advantage in the market, leading to lower fees for businesses.
The Democrat bill failed to pass in 2022, but Durbin plans to reintroduce the bill in this congressional session. However, the Act is likely to once again face stiff opposition from those who think that it would result in higher costs to consumers, weakened payment security, and limited access to credit for those who need it most.