The Durbin Amendment and Its Implications for Small Businesses

The Durbin Amendment and Its Implications for Small Businesses

As cards increasingly dominate the current payments landscape, debit cards have become an important part of the mix.

Infographics Durbin Amendment 1

However, the Durbin Amendment of 2010 has significantly affected US-based debit card operations. Retailers and financial institutions are feeling the effects of the legislation. 

We’ve put together this useful guide to help you learn about its purpose, unintended consequences, and the ongoing controversy around it.

Let’s get started.

The Durbin Amendment: Background

To fully understand any law or regulation, it’s useful to obtain some knowledge of its backstory. In the case of the Durbin Amendment, the law was predicated upon card-related disputes that had begun several decades earlier.

Lead-up to the Durbin Amendment

During the 1980s, consumers had begun to use plastic cards rather than checks to make purchases. As card processing volumes ramped up, retailers’ associations began bickering with card-issuing banks and payment card networks.

Essentially, retailers railed against overly high credit card transaction fees from card networks. Most complaints were related to Mastercard and Visa transactions.

During the early 2000s, retailers filed similar complaints about debit card transactions as well. Because the credit card fee battle was mired in courts, an easy resolution of the debit card issue was unlikely.

The Dodd-Frank Act Becomes Law

In 2010, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act. Then-President Obama signed the bill into law shortly thereafter. House and Senate lawmakers designed the bill to protect consumers and prevent economic downturns like the Great Recession of 2008. The Durbin Amendment (also called Regulation II) was a key part of the new law.

The Durbin Amendment Explained 

Crafted by Senator Dick Durbin (D-ill), the Durbin Amendment had two major provisions. The Washington, D.C.-based legislation was designed to level the credit card industry playing field. Essentially, the Federal Reserve Board wanted card-issuing banks’ processing fees to be more proportional to the companies’ costs.

Cap on Debit Card Interchange Rates

The most-discussed component of the Durbin Amendment is the cap imposed on the debit card-issuing bank. When a cardholder makes a purchase with the bank’s debit card, the retailer must pay an interchange fee to the bank.

The Durbin Amendment ties the debit card interchange fees to the size of the bank. Banks holding assets of at least $10 billion are affected by the regulatory cap. Smaller community banks and credit unions are exempt from this restriction.

Infographics Durbin Amendment 2

Specifically, the larger financial institutions can collect a maximum interchange fee of 0.05% of each transaction amount. The issuer can also receive a flat $0.21 along with $0.01 for fraud prevention compliance. The Federal Reserve Board of Governors (or the Fed) is tasked with imposing “price controls” on debit card interchange fees.

As a side note, interchange fees are often called “swipe fees.” This reference pertains to the act of swiping a card during a purchase transaction.

However, the Durbin Amendment applies to all debit transactions, even if the consumer does not swipe their card. To illustrate, EMV chip cards and contactless payment cards are also affected by the legislation.

Routing to unaffiliated networks

The Durbin Amendment’s second provision applies to all debit card issuers. Larger nationwide banks, smaller community banks, and credit unions are equally affected. The second clause is designed to eliminate card processing network exclusivity within the larger payments system.

All card issuers must enable debit card routing through two or more unaffiliated networks. Additionally, card networks cannot restrict the ability of small businesses or issuing banks to choose those routing networks.

This provision was intended to promote competition and enable retailers to choose the most economical routing option. Before this, card issuers and card networks selected debit networks based on their interchange income potential. Retailers had virtually no choice in the matter.

How the Durbin Amendment affects consumers and retailers

Consumers and retailers alike have been impacted by the Durbin Amendment’s implementation. In addition, several unintended consequences have resulted from this controversial law.

Impact on Consumers

The Durbin Amendment has had several negative effects on consumers. Individual customers were impacted in three different ways.

  • The Durbin Amendment’s supporters claimed that retailers would pass their debit card transaction savings on to consumers. Some retailers in highly competitive areas reduced their merchandise prices. However, most retail store owners didn’t see sufficient savings to justify taking that action.
  • Consumers also faced negative pushback from banks with drastically reduced revenue streams. Specifically, banks sought to recoup lost revenues by increasing deposit account fees by 3% to 5% (on average).
  • Checking accounts of consumers were also seriously impacted. Customers have been hit with account maintenance fees, insufficient funds fees, and account inactivity fees. In addition, larger banks have substantially reduced their debit card rewards programs.

In response, many consumers switched their businesses to smaller banks without regulatory restrictions. These financial institutions may offer popular financial services such as free checking accounts. The smaller banks might also offer credit card rewards programs.

Impact on Retailers

The Durbin Amendment also had negative financial effects on many retailers. Smaller retailers were especially hard hit.

  • The Durbin Amendment resulted in penalties on merchants with many smaller transactions, such as convenience stores. Specifically, Mastercard and Visa implemented the highest possible transaction fees for smaller purchases.
  • Although the interchange rate had dropped considerably, smaller-scale merchants saw more than a two-fold increase in their per-transaction fees. This was due to the new flat-rate interchange fee structure.

In addition, merchants now have fewer free business checking account options. Again, smaller community banks and credit unions may offer more desirable financial services and rate packages.

Debates Around the Durbin Amendment

Almost since the Durbin Amendment’s implementation, there have been ongoing debates about the legislation’s strengths and weaknesses. The differing needs of larger banks, retailers, and consumers are the source of these discussions. In recent years, there have been calls to repeal the Durbin Amendment entirely.

The Parties Involved 

The Durbin Amendment debate involves two opposing groups, each one wishing to further their respective economic interests. The larger banks (and their lobbyists) want to scrap the Durbin Amendment because it decreases bank card revenues.

Conversely, loose national associations of retailers and related interest groups want to keep the Durbin Amendment intact. Collectively, the groups say the law can potentially decrease credit card processing fees. To (hopefully) accomplish this goal, the law would copy the methods used in the debit card-related legislation.

The Durbin Amendment: Pros 

The Durbin Amendment’s supporters present three points in favor of the law. These arguments reflect the concerns of many retailers.

  • The lack of regulation will lead to higher interchange fees for businesses. This will lead to increased prices for consumers.
  • Without the Durbin Amendment, card networks will reinstate their debit card routing monopoly. With no competition, the networks will have no incentive to engage in fair practices.
  • Global card networks dominate bank card operations in the US. This has resulted in a lack of transparency and reduced market freedom. As a result, the US has fallen behind other international payment leaders in innovation and competition.

The Durbin Amendment: Cons

The Durbin Amendment opposition also lists three arguments against this controversial law. Critics point to adverse effects on small businesses and consumers.

  • Capping the debit interchange rate penalizes businesses with low average sale amounts.
  • Retailers are not passing the debit interchange cost savings on to their customers.
  • Lower big bank interchange revenues have led to higher banking costs. The elimination of free checking and other consumer perks has also occurred.

The Durbin Amendment: Recent Developments

Over the years, Congress has periodically debated whether to change or scrap the Durbin Amendment. Interest groups on both sides have also weighed in on the issue.

  • An early 2017 effort was part of a bigger drive to repeal the entire Dodd-Frank Wall Street Reform and Consumer Protection Act. That effort was not successful.
  • April 1, 2019: The Federal Reserve adjusts the interchange fee cap to 22 cents plus 0.05% of the transaction amount, due to inflation. This is the first increase in the cap since it was initially implemented in 2011.
  • In May 2021, the Federal Reserve Board proposed to include card-not-present transactions in the Durbin Amendment’s network exclusivity clause.
  • Also in May 2021, five financial trade groups, including credit union associations, published their opposition to expanding the Durbin Amendment to credit card purchases. There are also concerns about decreased lending opportunities and consumer choices within credit unions and community banks.
  • In June 2021, retail organizations expressed support for the expansion of the Durbin Amendment to credit card transactions. Paraphrased, the groups’ collective letter stated that failure to do so would harm consumers and small businesses. These negative impacts would take place as the US economy continues to recover from the COVID-19 pandemic.
  • Since July 2021, Sen. Dick Durbin has been working on legislation that extends the Durbin Amendment provisions to credit card interchange practices. Content and timeline specifics are not yet available.

Finding the Best Overall Option

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FAQs About Durbin Amendment

Q: What is the Durbin Amendment?

A: The Durbin Amendment is a provision of the Dodd-Frank Wall Street Reform and Consumer Protection Act that regulates debit card interchange fees and requires that debit card transactions be routed over at least two unaffiliated payment networks—for example, a PIN debit and a signature debit network. It was named after Senator Richard Durbin, who sponsored the amendment.

Q: What are interchange fees?

A: Interchange fees are fees paid by merchants to card-issuing banks whenever a customer uses a debit card to make a purchase. These fees are set by the card networks (Visa, Mastercard, etc.) and are typically a percentage of the transaction amount. Prior to the Durbin Amendment, these fees were unregulated and varied widely among card networks and banks.

Q: How does the Durbin Amendment regulate interchange fees?

A: The Durbin Amendment limits the amount of interchange fees that card-issuing banks can charge to merchants. The maximum allowable fee is currently set at 0.05% of the transaction amount plus 22 cents per transaction. This is significantly lower than the average interchange fee prior to the Durbin Amendment.

Q: Why was the Durbin Amendment enacted?

A: The Durbin Amendment was enacted in response to concerns that interchange fees were too high and that they were being passed on to consumers in the form of higher prices. Proponents of the amendment argued that regulating interchange fees would promote competition and lower costs for merchants, which would ultimately benefit consumers.

Q: How has the Durbin Amendment affected consumers?

A: The impact of the Durbin Amendment on consumers is a matter of debate. Proponents of the amendment argue that it has led to lower prices for consumers, as merchants have been able to negotiate lower transaction fees with banks. However, opponents argue that the amendment has led to higher fees for consumers in other areas, such as checking account fees, as banks have looked to make up for lost revenue.

Q: What other provisions are included in the Durbin Amendment?

A: In addition to regulating interchange fees, the Durbin Amendment requires that debit card transactions be routed over at least two payment networks, which promotes competition among networks and ensures that merchants have access to multiple processing options. The amendment also prohibits exclusive arrangements between networks and issuers, which further promotes competition.

Q: Who is affected by the Durbin Amendment?

A: The Durbin Amendment affects a wide range of stakeholders, including merchants, card-issuing banks, payment networks, and consumers. It has had a particularly significant impact on smaller banks and credit unions, which have struggled to compete with larger banks that are better able to absorb the loss of interchange revenue.

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