It is sometimes said that the definition of a true compromise is one in which neither party is really happy about the end result. If you accept that definition, perhaps the Durbin Amendment represents the ultimate compromise.
The Durbin Amendment, a last-minute provision of Dodd-Frank Act, put a cap on the fees banks over $10 billion in assets could collect on debit card transactions – or rather, it directed the Federal Reserve to regulate that matter. But the cap on interchange fees was supposed to make up for it, at least to consumers, by enabling merchants to lower their prices because they would save a bundle on swipe fees.
Not so much. According to a recent study out of the Federal Reserve Bank of Richmond, the Durbin Amendment resulted in neither cost savings to consumers, nor (interestingly enough) savings to merchants.
“We were saying this back when this was first proposed, that it wasn’t going to help the consumers at all and that there were going to be a lot of unintended consequences,” said Jon Skarin, senior vice president at the Massachusetts Bankers Association. “I think the Richmond Fed has proven both of those things to be accurate.”
Durbin’s impact on the banking industry has been known for some time now. A Federal Reserve study released last year estimated that Durbin slashed yearly interchange fees to banks over $10 billion in assets by as much as $14 billion, or 5 percent of noninterest income, and that those banks coped with the loss of interchange revenue by hiking deposit fees, recouping around 30 percent of the lost swipe fees.
However, Durbin’s impact on merchants had gone largely unexamined, and that prompted the Richmond Fed to partner with Javelin Strategy & Research on a study of Regulation II’s effects on 420 merchants across 26 sectors.
Among the retailers surveyed, two-thirds reported either no change or they did not know whether their debit costs had changed as a result of Durbin. Less than 10 percent reported a decrease in swipe fees, and strikingly, a quarter of respondents said their debit fees had actually increased post-Durbin.
The Law Of Unintended Consequences
The Durbin Amendment was supposed to limit the fees that merchants paid for the privilege of accepting payment by debit card – so what happened?
Well, a few things. First, in a pre-Durbin world, different types of retailers paid different interchange fees, depending on the incidence of fraud and chargebacks across different sectors. When the debit interchange fee was standardized at 21 cents, plus 5 basis points, some sectors benefitted and others did not. The Richmond Fed found in its study, for instance, that delivery services and fast food merchants were among those that reported the most increases in their costs associated with accepting debit cards.
Second, while Durbin capped the interchange fee paid by a merchant to the cardholder’s issuing financial institution, it said nothing whatsoever about the merchant discount rate, the fee the merchant pays to his or her own financial institution in order to accept debit card payments.
Finally, before Durbin, card networks offered merchants discounted fees on small-dollar transactions. In the Richmond Fed’s example, Visa and MasterCard set the debit interchange rate at 4 cents, plus 1.55 percent of the transaction value for transactions under $15, meaning a $2 sale would incur only a 7-cent interchange fee.
When Durbin was implemented by the Federal Reserve in the form of Regulation II, card networks standardized that swipe fee, meaning that small-dollar transactions got a whole lot more expensive.
“If you didn’t see any reduction in your monthly bill that you’re getting from your processor, then you didn’t have any savings to pass onto your customer. That was unfortunate for the consumer,” said Jon Hurst, president of the Retailers Association of Massachusetts.
Just 2 percent of those merchants the Richmond Fed surveyed reported cutting prices in response to the regulation, while 23 percent raised prices and 75 percent made no changes.
Hurst also cited persistently low consumer spending, a byproduct of the lagging recovery, as only adding to the pain. Where consumers have increased their spending, he said, they have mainly done so via online channels.
“If your costs aren’t dropping and your sales aren’t going up, it’s hard to pass savings onto your customer,” he said.
And when financial institutions sue retailers in the wake of data breaches, that’s just adding insult to injury in the merchants’ point of view, Hurst said.
“If the banking industry is not doing everything they can to prevent credit card fraud and they are collecting substantial amounts of money upfront for fraud then don’t try to recover it through suits against those that are serving the customers,” he said. “How many times can they collect the same money?”
