Retail Industry Claim: Debit Card Reform Working -- Or Is It?

NEW YORK (BankingMyWay) — It’s been two years since the Dodd-Frank financial reform bill was passed, and one of its key provisions – the so-called “Durbin Amendment” that sought to lower the costs of debit card interchange fees for merchants – is still controversial.

The Durbin rule, which took effect in October, mandates that the Federal Reserve regulate debit card fees to ensure they’re “reasonable and proportional.”

But there are plenty of loopholes and escape hatches for banks and credit card firms.

For example . . .

  • Only banks with more than $10 billion in assets are liable for the new debit card rules.
  • Big credit card companies such Visa and MasterCard aren’t regulated by the provision, allowing them to charge whatever they want in debit card fees.
  • Prepaid cards aren’t included, a strange omission considering prepaid card owners are more likely to be lower-income consumers with higher debt burdens – a consumer demographic that would seem tailor-made for a debit card fee price break.

Consumers looking to get a grip on whether the Durbin Amendment is panning out seem to be getting two different stories.

On May 1 the Federal Reserve issued a report noting that the rule was costing big banks $8.4 billion annually. On the surface, that doesn’t seem like bad news for bank customers. After all, who cares what mega-banks pay in debit card fees? But when banks lose money in one area, they try to make it up in another.

That’s why banks are cutting popular programs such as credit card rewards programs and starting to charge monthly fees for formerly “free” checking accounts. According to the credit card website, which issues periodic updates on the impact of the amendment, the regulations may do as much harm as good as time goes on.

This from the report, most recently updated in May:

Although the Durbin Amendment will decrease the amount that large banks can charge in interchange fees, loopholes within the legislation will significantly diminish its impact for both merchants and banks over time.
Since prepaid cards are exempt from these regulations, it is also likely that major banks will begin to introduce these offers and encourage customers to switch from checking accounts to prepaid cards, especially given the constant convergence of these two products.
Given that only banks and not networks are subject to these restrictions, banks will be collecting less in fees while paying unrestricted fees to the networks. It is unlikely that major banks will allow their revenue to decrease significantly, so we predict that they will make up for lost revenue by increasing monthly fees and minimum balance requirements, and making debit card reward programs less appealing.

But merchant groups say the Durbin rule is working just fine and that consumers are clear winners in the aftermath of the debit card fee changes.

In a June 14 release from the Washington, D.C.-based Merchants Payments Coalition, a big proponent of the Durbin rule, the group says consumers are benefiting as retailers pass on interchange fees savings to customers.

The MPC cites Home Depot as one of the latest big retailers to cut prices (on 3,000 items, the group says) thanks to the Durbin rule. “The evidence is plain that more transparency and competition on debit-card swipe fees has helped customers,” offers Doug Kantor, counsel to the coalition, in a press release.

The group also says that more banks are offering free checking accounts, and that banks that do charge fees for checking accounts are cutting back on amounts.

No doubt, the jury is still out on whether the Durbin Amendment is working or not, and advocates on both sides have serious cases to make to consumers.

But in an economy in which consumers toss nickels around like manhole covers, any savings on debit cards fees can help – as long as those savings aren’t counterbalanced by larger fees on other banking and financial services products.

More information is needed to see whether that’s the case.

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