The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 created a new section 920 of the Electronic Fund Transfer Act (“EFTA Section 920”). This section is often referred to as the “Durbin amendment” for Senator Dick Durbin, who introduced it. It requires the Federal Reserve Board to issue rules relating to debit card interchange fees, network exclusivity, and transaction routing.
On December 13 2010, the Board submitted a proposed rule that would establish standards that can be used to determine whether debit card interchange fees received or charged by issuers are “reasonable and proportional” to the issuer’s cost. The proposed rule would also give retailers greater ability to use cheaper networks to process their debit card transactions. Credit card interchange fees are not covered by the rule.
What are Interchange Fees?
Interchange fees, also called “swipe fees,” are the fees merchants pay when they accept credit or debit cards. It averages 1-2% of the transaction amount. In the case of Visa and MasterCard transactions, a portion of the fee goes to the merchant’s bank, while the majority goes to the financial institution that issued the debit card. Visa and MasterCard don’t take a direct cut, but they are paid through their agreements with financial institutions.
Signature-based debit transactions (which often require consumers to choose “credit” at the cash register) are more lucrative to issuers than transactions where consumers enter a PIN, and fees also vary depending on the type of card used (reward versus non-reward, for example).
Retailers have called interchange fees a “hidden tax” on consumers, and have complained that the current system is not competitive. The National Retail Federation claims that swipe fees costs the average family $427 a year. Retailers estimate they paid $20 billion in debit card swipe fees in 2008, though Fed figures estimate retailers paid $16 billion in those fees in 2009. Either way, it’s a substantial sum of money and there will be winners and losers if it changes.
Retailers also complain that they have been prevented by card company rules from telling customers how much swipe fees cost them, assessing a surcharge for purchases made by plastic, or steering consumers to cheaper payment methods.
Card issuers, on the other hand, have maintained that cards speed up transaction time at the cash register, offer merchants a better level of fraud protection (as opposed to checks) and result in higher sales.
There are two main components to the proposed rules: fee caps and network competition.
Fee Caps: Two alternatives were proposed. The first would cap debit interchange fees at 12 cents per transaction. The second would allow issuers to charge a fee that is the average variable cost of processing a transaction, with a safe harbor of 7 cents per transaction and a cap of 12 cents. In 2009, the average debit interchange fee was 44 cents per transaction. The new rules would cut interchange fees (and revenues) by as much as 70-90%.
Competition: The Board has proposed two approaches to increase competition among the networks that process these transactions. Under one, all debit card transactions would be routed over at least two unaffiliated debit card networks which could mean one network for signature-based debit transactions, and another unaffiliated network for PIN-based debit transactions. The drawback of this approach is that millions of merchants do not process PIN-based transactions, and therefore, would have no competive options.
The other approach would require merchants to be able to route transactions over at least two different networks for each type of transaction (signature debit versus PIN debit).