Politicians on both sides of the aisle are fighting to pass the Financial Stability Act currently in Congress. However, one of the more than 400 amendments attached to the bill could have adverse effects to what the bill is trying to accomplish.
What is the Durbin Interchange Amendment?
The Durbin Interchange Amendment was introduced two weeks before the Senate voted on and passed the bill. There was no debate, discussion, or vetting on the amendment.
Introduced by Senator Dick Durbin of Illinois, the amendment will enable the Federal Reserve to set interchange or “swipe” fees that merchants pay to accept debit cards and credit cards. Merchants will be able to pay discounts to consumers who use the preferred payment method of the merchant and to set minimum and maximum transaction amounts for card use.
Why is There Opposition to the Amendment?
Credit unions, banks, state and federal agencies, and the entire electronic payments industry are fighting to remove this amendment from the bill because they believe it will create unintended consequences for consumers. The legislation has the potential to eliminate debit card programs at credit unions and community banks and, as a result, eliminate these smaller financial institutions altogether.
How Does Interchange Work?
Interchange is a fee paid by merchants to the financial institution that issues the consumer’s debit or credit card. In other words, every time Sally makes a purchase at Walmart using her ABC Bank debit card, Walmart pays ABC Bank a percentage of that transaction. Sally pays nothing other than the cost of her goods.
The fee is a cost to cover the operation of the program, rewards programs, and risks such as fraud and data security. Without these fees, ABC Bank would not be able to fund debit card and credit card programs. Funding would have to come from other sources such as fees to the cardholder rather than the merchant.
What Would It Mean if Interchange Fees were Regulated?
The amendment is intended to regulate large financial institutions. The problem is that it does not take in to account that decreasing the fees charged by the big banks through federal regulation makes their products more desirable to merchants.
Currently, all financial institutions, regardless of size, pay the same fees. This legislation would mandate that big banks charge smaller fees while small banks and credit unions would continue to charge their current fees to fund their programs. This also gives merchants the freedom to discriminate on which cards they accept.
Dan Berger, executive vice president of government affairs for the National Association of Federal Credit Unions (NAFCU), wrote to Senate leaders, “If credit unions continue to charge market-based interchange fees, merchants will likely overtly and covertly discriminate against credit union cards in favor of price-controlled large institution products, or some merchants will just refuse to accept credit union cards altogether.”
If the debit cards of small financial institutions, like credit unions, are not accepted by merchants,
- Consumers will not want those cards because they can’t use them.
- Without the fees associated with card usage, credit unions and small banks would have to start charging fees to the card user to fund the programs or eliminate the programs completely.
- Consumers will not want a checking account with a financial institution that charges fees to use a debit card or doesn’t offer debit cards.
- Consumers will go to the big banks, if the big banks’ more stringent policies accept them, to open a checking account with a no-fee debit card.
- Big banks increase their profit even though they are charging smaller fees to merchants and credit union and community banks would be unable to continue operations.
New Report Confirms Negative Impact of Durbin Amendment
Mercator Advisory Group, a firm based in Maynard, Mass. performed an independent industry study of the amendment to determine the impact on the electronic payments industry. Here are their determinations:
- Consumers would experience a rise in costs of multiple financial services; from bank fees to retail charges.
- Large card issuers will encourage more credit-based services and possibly add fees to debit accounts.
- Smaller financial institutions, though exempt from portions of the amendment, would not come out of the legislation unscathed.
- State and federal agencies are concerned that they would no longer be able to support the prepaid card programs for public benefit payments or have to find funding from other sources.
- Though merchants may see direct debit interchange costs decrease, they will also see consumers using less debit and more credit products as well as conducting more cash and paper check transactions.
If the Durbin Amendment remains in the Financial Reform Bill, and the bill passes, consumers may see less financial reform and more financial restrictions leaving them with less choices. The ripple effect of this amendment would include small financial institutions eliminating debit card programs and eventually closing their doors completely due to the lack of income.
For more information about this issue, consumers can visit the following websites:
The Electronic Payments Coalition
The Card Alliance
The Credit Union National Association
Shannon Boyda - Shannon Boyda is a marketing manager for a credit union outside of Philadelphia, PA. With a degree in English, Shannon has held various ...
