By David S. Brown, Esq.
Please be advised that today, the U.S. Senate rejected an amendment to Senate Bill 782, the Economic Development Act, that would have called for a 6-month delay of the pending July 21st effective date of the Durbin Amendment. The amendment would also have required the Federal Reserve, OCC, FDIC and NCUA to conduct a joint 6-month study of the Federal Reserve’s debit interchange rule to protect against unintended consequences that the Durbin Amendment may produce. The Tester-Corker amendment failed by a vote of 54 to 45. It is important to note that a majority of the Senate voted in favor of this amendment; however, a 60-vote threshold was required for passage.
The Durbin Amendment is an amendment within the Dodd-Frank Act that was signed into law by President Obama on July 21, 2010. It establishes new restrictions for governing debit card transaction interchange fees. For those who don’t know, interchange fees are fees that an issuing bank deducts from the amount it pays the acquiring bank that handles a credit or debit card transaction for a merchant.[1] Typically, these fees are set by the credit card networks such as Visa and MasterCard and represent about 2% of the total sale.[2]
Unlike credit cards, where the user borrows money from a creditor and pays it back at the end of the month, debit cards are directly tied to money in the cardholder’s bank account.[3] The Durbin Amendment empowers the newly created Consumer Financial Protection Bureau (“CFPB”) to cap interchange fees charged by banks during a debit card transaction by requiring that any interchange transaction fee must be reasonable and proportional to the cost incurred by the issuer with respect to the transaction.[4] The Durbin Amendment only applies to lending institutions with assets worth more than $10 billion. In other words, the CFPB cannot cap interchange fees between lenders with less than $10 billion in assets, or 99% of U.S. Banks.[5] Government-administered payment programs and reloadable prepaid cards are also exempt from the Durbin Amendment.[6]
In theory, the Durbin Amendment is a way to reduce costs to the consumer by limiting the amount that banks can charge merchants for debit transactions. In reality, though, the Durbin Amendment may cause more harm than good. First, there is no evidence that indicates merchants are willing to pass along any savings realized to consumers. Second, the credit card networks are responding by creating rate schedules that may significantly hamper competition. Specifically, Visa recently indicated that it will introduce a dual interchange rate schedule for issuing banks and credit unions based on the Dodd-Frank Act.[7] In other words, Visa will implement one rate for large institutions governed by the Dodd-Frank and a different rate schedule for those institutions that are exempt from the Act, because they fall below the threshold of $10 billion in assets. Many think that this will lead merchants to only accept cards from the largest banks. After all, those cards will have lower interchange rates which will translate to larger profits for the merchant.[8] As a result, community banks and other smaller lending institutions will be injured as their cards will not be accepted by merchants looking to increase profit margins. Consumers will also be hurt as they will be unable to shop at stores that refuse to accept the card that they have in their wallet.
Although still unknown, the impact that the Dodd-Frank Act and the Durbin Amendment will have on the financial sector promises to be substantial. Certainly, increased regulation appears to be imminent. As always, the attorneys at Weltman, Weinberg & Reis are here to assist you in understanding and operating within these changes as they come about.
David S. Brown is an Associate in Commercial Collections; focused on Commercial Banking, Commercial Business, Special Collections and Commercial/Agency Services. He is based in the Cleveland office of Weltman, Weinberg & Reis Co., LPA. He can be reached at (216) 685-1062 or dbrown@weltman.com.
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FOOTNOTES:
[1] Interchange fee, Wikipedia, http://en.wikipedia.org/wiki/Interchange_fee
[2] Mitchell, Stacy, Soaring Credit Card Transaction Fees Squeeze Independent Businesses, The New Rules Project, May 5, 2009, www.newrules.org
[3] 2010 Financial Reform and Debit Interchange Rates, http://interchangerate.com/?p=45
[4] The Consumer Financial Protection Act, supra.
[5] Admin, Wall Street Reform: The Consumer Financial Protection Bureau, Americans for Financial Reform, June 30, 2010, http://ourfinancialsecurity.org/2010/06/
[6] The Consumer Financial Protection Act, supra.
[7-8] VISA to Offer Two-Tier Interchange Pricing, GBA e-Bulletin, http://www.gabankers.com/e-Bulletin/gba_bulletinJan142011.htm
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