Durbin Amendment Backfires, Study Says


A new study by the Federal Reserve Bank of Richmond reveals that the Durbin Amendment, originally intended to save retailers and consumers money by reducing swipe fees for debit card transactions, has come up very short.

The swipe fee — also known as interchange — is set by the credit card associations (Visa®, MasterCard®, American Express® and Discover®), paid to their member banks and charged to credit card processors, who pass it along to merchants as part of the discount fee. It makes up the largest portion of credit card processing fees.

Merchants have long criticized the card networks and their issuing banks for setting excessively high interchange fees that drive up the costs of accepting card payments. Eventually, Congress took up their cause with the Durbin Amendment, which is part of the landmark Dodd-Frank Wall Street Reform and Consumer Protection Act passed in 2010. The amendment led to a Federal Reserve regulation that capped how much card-issuing banks can charge a merchant to process a debit card transaction. Proponents maintained that merchants would pass along their savings to consumers in the form of lower prices for goods and services.

The Impact of the Durbin Amendment on Merchants survey results indicate that the interchange cap did little to lower costs for the majority of merchants; in fact, it actually made it more expensive for some merchants to accept debit cards. Its findings include:

  • Two-thirds of merchants surveyed reported no change or did not know the change of debit costs post-regulation.
  • One-fourth reported an increase of debit costs, especially for small-ticket transactions.
  • Less than 10 percent reported a decrease of debit costs.

The survey’s authors also noted what they called “asymmetric merchant reactions” to changing debit costs in terms of adjusting prices and debit restrictions. “A sizable fraction of merchants are found to raise prices or debit restrictions as their costs of accepting debit cards increase,” they wrote. “However, few merchants are found to reduce prices or debit restrictions as debit costs decrease. The sources of the asymmetric reactions remain a puzzle, which may warrant additional research.”

The impact of the Durbin Amendment has also varied substantially across different merchant sectors, the study concludes. Most notably, it had an unforeseen effect on small-ticket debit card transactions, making them more costly for merchants.

“Prior to the regulation, most networks offered discounted debit interchange fees for small-ticket transactions as a way to encourage card acceptance by merchants for those transactions,” according to the study’s authors, who add that once the Durbin Amendment became law, those card networks stopped offering the small-ticket discount and began charging merchants the maximum amount allowed under the law. Not surprisingly, some merchants passed the higher fee costs along to customer in the form of higher prices.

One way merchants can get a hold on their credit card processing costs is with TransFreedom® from TransFirst®. This innovative, flat-fee processing solution simplifies merchant billing by combining several individual monthly charges into a single monthly fee. That means no more hidden fees and charges, and reconciling your merchant account statement is simplified because you don’t need to figure out figure out interchange rates or interpret qualifying rules.

Learn more about the potential savings offered by TransFreedom by talking with a TransFirst representative today.

TransFirst, LLC is a registered ISO/MSP of: Wells Fargo Bank, N.A., Walnut Creek, CA; Synovus Bank, Columbus, GA; and Deutsche Bank, New York, NY; for Visa® and MasterCard® transactions only.

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federally-registered U.S. service marks of Total System Services, Inc. TransFirst is a registered ISO/MSP of: Wells Fargo Bank, N.A., Walnut Creek, CA; Synovus Bank, Columbus, GA; and Deutsche Bank, New York, NY; for Visa® and MasterCard® transactions only. TSYS Merchant Solutions is a registered ISO/MSP of Wells Fargo Bank, N.A., Walnut Creek, CA and Synovus Bank, Columbus, GA.