If you read my blog because we are old high school chums, please skip this long and boring post, which discusses the Durbin Amendment to the Dodd-Frank Wall Street Reform and Consumer Protection Act, which is every bit as much fun as it sounds like.
If you read my blog because you work in payments, you’ve already heard the Durbin Amendment discussed in hushed tones:
Payments Person 1: “How’s the business model for that going to work?”
Payments Persion 2: [sotto voce] “After Durbin? Who knows?”
If you’re in payments and not already familiar with Durbin, stick around. (If you’re not in payments and still here, you’ll want to get a cursory understanding of interchange plus some No-Doz, before you dive in.)
You’re still here, huh? And you didn’t read up on interchange, did you? Fine, be that way. From the Amendment:
“The term ‘interchange transaction fee’ means any fee … charged … by a payment card network [like Visa] for the purpose of compensating an issuer [like Bank of America] for its involvement in an electronic debit transaction.”
Starting Point: Ignorance and a Whole Lot of Questions
When I started to research this post, I didn’t know much about Durbin beyond the fact that it engenders shock and awe among payments industry employees. I wanted to learn more, and also to answer these questions:
- Will Durbin make debit cards less available or more expensive for consumers?
- If debit becomes less profitable and banks stop promoting it, where do the payments go? To credit cards, in this unending recession? Back to checks? Somewhere else?
- Does Durbin give large retailers or tech companies like Google and Apple greater incentive to build their own payment networks?
- Is Durbin likely to influence the adoption of NFC by merchants?
- Does Durbin impact payment products other than debit cards?
I’ll stop here so you can post any other questions you have in the comments. (“Seriously, you do this for fun?” doesn’t count.)
Step 1: Stalking the Elusive Amendment
The first thing I did was Google “text of Durbin Amendment,” which led me to THOMAS, which describes itself as, “In the spirit of Thomas Jefferson, legislative information from the Library of Congress.” There was a helpful paragraph that read:
AMENDMENT PURPOSE: To ensure that the fees that small businesses and other entities are charged for accepting debit cards are reasonable and proportional to the costs incurred etc.
So I was in the right neighborhood. But when I clicked on the link to ‘TEXT OF AMENDMENT AS SUBMITTED,’ I found myself looking at another link entitled “Congo Conflict Minerals.” And when I clicked a link to a ‘Printer Friendly Display’ I found myself wading through paragraphs like this:
On page 1552, beginning on line 16, strike “the President” and all that follows through “Senate,” on line 19 and insert the following: “the Class B directors of the Federal Reserve Bank of New York shall be designated by the Board of Governors, etc.”
I’ll spare you the rest of the search process, which involved too much time, a lawyer friend, and my brilliant academic sister. Eventually, Google came through with a useful PDF. Which may be completely fabricated, but at least it’s readable, so I decided to run with it.
It’s surprisingly hard for a US citizen to find a US law. Just sayin’.
Step 2: Reading the Amendment
Once I found it I read through a lot of the following so you wouldn’t have to:
‘‘(A) IN GENERAL.—A payment card network shall not, directly or through any agent, processor, or licensed member of the network, by contract, requirement, condition, penalty, or otherwise, inhibit the ability of any person to provide a discount or in-kind incentive for payment by the use of cash, checks, debit cards, or credit cards to the extent that—“
I understand that the statute turns into hundreds of pages of regulations, but even for you, dear reader, I’m not tackling that. So here, as best as I can make out, is what the Durbin Amendment says. Assuming that what I was reading was, in fact, the Durbin Amendment, and not a parody by The Onion.
- Interchange fees for debit transactions must be “reasonable and proportional” to the issuer’s transaction cost. If you’re running a debit card network and it costs you $.0005 to process a transaction, don’t charge the merchant two bucks.
- In assessing whether fees are “reasonable and proportional,” the Fed is supposed to consider the functional similarity between debit transactions and paper checks. (Checks have to clear at par. If I write you a check for $100, your bank can’t slice off $2.50 and pay out $97.50 when you cash the check. In a debit transaction, interchange is the slice taken off the transaction’s face value. So you see where this is going.)
- The Fed can also only consider costs directly associated with the debit clearing process. Those all-expenses paid tropical junkets for the card issuing bank’s Board of Directors don’t count.
- Banks that issue debit cards and have less than $10 billion in assets can charge whatever interchange they want. Of course, that doesn’t do them much good if their larger competitors are forced to charge less.
- The government can charge whatever it wants on its own payment cards. It’s good to be in charge.
- Issuers can charge whatever interchange they want on reloadable prepaid cards that meet certain conditions.
- The government can also regulate network fees to prevent them from being used to sneak around the restrictions on interchange fees.
- Merchants can offer discounts to encourage customers to pay through a preferred payment channel like cash, check, credit card, or debit card.
- Merchants can set minimum transaction amounts for credit cards. Government agencies and universities can set maximum amounts. (Harvard is happy to kill students’ parents with fees; less happy with credit card companies killing Harvard with fees.)
Step 3: Understanding the Implications
At the end of the day, the government cut debit interchange fees from approximately 40 cents a transaction to 21 cents. The next step was understanding the implications. What happens industry-wide when issuers earn less per debit transaction but merchants have the incentive and ability to steer customers towards debit?
And this is where this post got stuck, and stayed stuck, until my company invited one of our Durbin experts in for a Durbin snack-and-learn. But she came in, and I was finally got answers to my questions, and I can finally post this post.
Q: Will Durbin make debit cards less available or more expensive for consumers?
A: Yes. Debit rewards are probably a thing of the past, unless you pay for them. And banks will make up the revenues elsewhere in checking account fees, etc.
Q: If debit becomes less profitable and banks stop promoting it, where do the payments go? To credit cards, in this post-recession world? Back to checks? Somewhere else?
A: Prepaid cards. Plain-vanilla general purpose reloadable prepaid cards are exempt from the interchange cap. (You buy a card, pay cash to load it, use it like a credit card, and load it again.)
Q: Does Durbin give large retailers or tech companies like Google and Apple greater incentive to build their own payment networks?
A: No. It makes it less expensive for them to take payments from existing payment products.
Q: Is Durbin likely to influence the adoption of NFC by merchants?
A: Nope. Not relevant.
Q: Does Durbin impact payment products other than debit cards?
A: Yes. Prepaid cards are also regulated unless they meet specific requirements for exemption.
A Final Word (You’ve Come This Far, Bear with me a Little Longer)
At the Durbin snack-and-learn, a smart guy I work with asked, “Wasn’t the point of Dodd-Frank correcting the causes of the subprime mortgage mess? What does this have to do with mortgages?”
The Wall Street Journal asked the same question in an editorial on 9/13/11:
What is the cost of overregulation? Bank of America appears to have provided part of the answer by announcing yesterday that the nation’s largest bank will cut 30,000 jobs between now and 2014. CEO Brian Moynihan said the bank’s plan is to slash $5 billion in annual expenses from its consumer businesses… How exactly does forcing banks to charge Wal-Mart less money for operating an electronic payment system prevent the next financial crisis? … The Fed dutifully ordered banks to cut their fees almost in half. Bank of America disclosed in its most recent quarterly report that this change will reduce the bank’s debit-card revenues by $475 million in just the fourth quarter of this year. The new rules take effect on October 1, so BofA seems to have sensible timing as it begins to shed workers from a consumer business that has become suddenly less profitable by federal edict.