The Durbin Amendment

The Durbin Amendment is Section 920 in the Dodd-Frank Wall Street Reform and Consumer Act, which is part of the broader Financial Regulation Reform and Consumer Act passed by the Senate in May 2010.

The Durbin Amendment was included in the Dodd-Frank bill by Senator Richard Durbin (D-Illinois). Among other things, it require the Federal Reserve to set ‘reasonable and proportional’ rates and fees for debit interchange rate.

On June 29, 2011, the Federal Reserve ruled on the Durbin Amendment. The effective date for most of the Durbin requirements was October 1, 2011.

Based on their ruling, the Federal Reserve capped transaction fees for debit cards at 21 cents per transaction for large institutions (greater than $10 billion in assets) with an additional allowance of 5 basis points (.05%) of transaction value to account for fraud losses, and an additional $.01 cent per transaction for fraud prevention (if certain fraud prevention standards established by the Board are met). For the average $38.00 debit card transaction, the interchange fees will be around $.24, a decrease of about 45% from pre-Durbin rates.


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Durbin Amendment overview

Key Take Aways

The Durbin Amendment only regulates debit card interchange and debit networks. Credit card rates are not discussed. The amendment is rather complex.  A few of the critical take-aways are: 

  • October 1, 2011 is the final deadline for implementation of most of the Durbin Amendment rules; specifically a two-tiered network option from VISA/MC and the interchange rate cap.
  • A cap of 21 cents on debit card swipe fees, with a one cent charge per transactions for fraud prevention if issuers meet pre-determined provisions, and a .05% ad valorem fee for fraud losses based on transaction amount. See example above.
  • The two-tiered network option for debit cards. This provision in theory will drive competition by giving merchants a choice as to which debit network they process transactions over. For example, present arrangements effectively force merchants to process many Visa transactions over the STAR network, even if competitors like PULSE and NYCE offer to conduct the same transaction at a lower processing price.
  • Banks with less than $10 billion in assets are exempt from the Durbin Amendment regulations.
  • July 21, 2011, merchants can impose a $10 minimum on credit card transaction and can offer cash discounts at the register for cash or debit purchases. This was previously banned in VISA® and Mastercard® merchant agreements. Remember, the Consumer Financial Protection Bureau is empowered on July 21st. They have the legal right to intercede on behalf of consumers who may question certain merchant practices, rates, product offers and related matters.


How to Prepare for the Durbin Amendment

A few things that merchants should consider as they prepare for Durbin implementation:

Understand your merchant account pricing.  Some processors and/or acquirers will suggest that you change your pricing to “Durbin-friendly” pricing to capitalize on the potential savings    . Before you change your plan, speak with a qualified merchant account representative. Not all pricing strategies are appropriate for all merchants.

Signature debit is no longer the optimum choice for debit transactions. Signature debit transactions do not have a choice of networks.  The two network system only applies to PIN debit. Be sure you are able to process PIN debit securely. Invest in the right terminal equipment to be sure you reap all the benefits of the new legislation. To further encourage PIN debit usage, invest in Merchant Funded Loyalty programs and other creative concepts to keep your customers loyal. (see below).

Consumers will be watching.  Merchants asked for consumer support in streamlining and revising the debit card interchange rules. With almost 50% savings for the merchant (down from 44 cents per transaction), consumers will be watching to see if they actually have the savings passed on to them.  Use this opportunity to invest in loyalty programs, lowering prices and make wise cash discount decisions at the check-out counter.

Cash discounts for cash and debit cards.  Merchants can legally offer cash discounts for cash and debit card transactions as well as credit card minimums. But beware! Recent research suggests that consumers aren’t going to bite on a 10% or less discount for cash or PIN debit cards.  Also, consumer data from other countries that imposed debit card regulations suggest that consumers will walk away from merchants who make it difficult to use their debit cards and/or credit cards for everyday purchases. Be flexible and see how consumers are reacting (if at all) to the regulations.

Real date for implementation is October 1, 2011.  Although merchants can begin to change their pricing strategies at the counter beginning July 21, 2011, the industry has until October 1, 2011 to implement the interchange rate caps, fraud prevention and access to two unaffiliated card networks. Issuers must comply with the two-tiered network provision by April 2012. Stay tuned to learn more about extended deadlines and who they will impact.


Infographic Transcript

Debit Cards, the Durbin Amendment and You 

The Durbin Amendment first appeared as a last-minute addition to the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. Now that the Federal Reserve has made its ruling on interchange fees, big changes have come to consumers, merchants, and banks. 

What it does

The Durbin Amendment, named for Senator Richard J. Durbin, is designed to reduce the cost of processing debit card transactions. It makes the Federal Reserve responsible for creating rules to limit interchange fees and introduce competition to the networks which process debit card transactions. Previously, merchants had few options to control transaction processing costs. The new rules change all that.

As of Oct. 1, 2011, there will be a fee ceiling of 21 cents on all transactions, plus a 0.05 percent ad valorem fee to cover fraud losses. Issuers who comply with fraud protection measures may charge an additional one cent. 

In addition, merchants have options which were not available to them in the past. They may now set a $10 minimum for credit card transactions, and offer discounts to customers who pay with cash or a debit card. Before Durbin, MasterCard and Visa had prohibited these practices. After April 1, 2012, debit card issuers must allow their cards to be processed on at least two independent networks. This means merchants will be able to choose the debit network they wish to use.

What this means

These fee changes could influence how merchants operate their business and how consumers choose to pay for purchases. For example, before the Durbin Amendment a merchant would have paid a 44 cent fee to process a $38 transaction. After Durbin, the base fee would be 21 cents. The debit card issuer may charge an additional one cent for fraud prevention, plus 0.05 percent to cover fraud losses. Under this formula, the cost to the merchant would be 24 cents - a substantial saving.

Traditionally, merchants paid swipe fees of between 1 and 3 percent, with some paying as much as 5 percent. While this may not sound like much, interchange fees paid by consumers and merchants added up to $48 billion in 2008, according to Forbes. 

Debit interchange regulation could affect merchants and consumers in a number of ways. Bank revenue from debit transaction fees could drop by 40 percent. Banks may try to counteract this by such means as adding new fees on checking accounts, increasing minimum balance requirements or dropping perks such as debit rewards programs. 

On the other hand, lower fees for merchants could translate into savings for consumers. With lower operating costs, merchants may choose to pass the savings on in the form of reduced prices. Another option would be to reward customers by offering special discounts to those who pay with cash or pin debit cards.

The take away

The Durbin Amendment puts a cap on debit card transaction fees and opens the interchange networks to competition. Merchants can now set minimums for credit card transactions and offer discounts to customers who pay with cash or pin debit. Costs for merchants and consumers will be lower, but so will debit card transaction revenue for big banks. The ultimate effect of this legislation will be determined by how banks, merchants and consumers handle the change.