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In Retrospect, Durbin Amendment Was Flawed From the Start

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The next thing we know, Senator Dick Durbin (D-Ill.) will have his own branded prepaid card.

After all, he did help spark a prepaid card revolution in the United States, which has led to the advent of the Lil Wayne Prepaid Card, the Approved Card from Suze Orman, and the Magic Johnson MasterCard – all of them introduced after the regulation named after him took effect in October 2011. So why wouldn’t he get in on the action?

Of course, I’m being somewhat facetious, but the fact of the matter is that Sen. Durbin championed the law that capped debit card swipe fees in a purported attempt to save merchants and consumers money.  Instead, it ended up costing consumers, banks, and certain merchants and has led to a significant restructuring of the payments market.

Given that the Durbin Amendment recently celebrated its first birthday, let’s take a closer look at the law’s effects to date.

As alluded to above, the law effectively robbed banks of roughly $8.4 billion in annual revenue, but that’s not to say that they’re completely out the money.  As expected, banks have made changes to compensate for the financial hit they took, including experimenting with new checking account fees, increasing checking account minimum balances, eliminating debit card rewards programs, and placing an increased emphasis on prepaid cards (which can serve as apt fill-ins for checking accounts given that they offer the same features, save a physical checkbook).

Even though prepaid cards are close relatives to debit cards, they were excluded from the law’s regulations (provided certain conditions are met) and are taking off like a rocket as a result.  Not only have we seen a number of high-profile prepaid cards hit the market since the Durbin Amendment took effect, including the first prepaid offerings from the likes of American Express and Chase, but projections show that consumers will load $117 billion onto prepaid cards in 2013 – a 200% increase from 2010.  The rise of the prepaid card is therefore sure to be one of the Durbin Amendment’s biggest legacies.  It also likely indicates that any savings merchants derive from the law will be somewhat short-lived, since lower costs imposed by banks will incentivize consumers to increasingly use financial products whose swipe fees have not been regulated, like prepaid cards and credit cards.

Up until now, however, many merchants have undoubtedly benefitted from the law, as Heartland Payment Systems – the fifth largest payment processor in the United States – estimates that its customers have saved nearly $265 million in interchange fees since it was put into effect.  The benefit has been far from universal, though.  Merchants who sell predominantly low-cost goods (e.g. coffee shops) are actually seeing their interchange fees rise, according to a study from TSG Metrics, because issuers are now charging the maximum interchange fee allowed for all purchases, rather than tailoring what they charge to the amount of each respective purchase.

Merchants also are not passing along whatever savings they’ve derived from the law to consumers, as legislators had hoped.  Consumers are actually paying 1.5% more at national retailers than before the Durbin Amendment took effect, according to a recent study from the Electronic Payments Coalition.

Merchants would, of course, argue that this number would have been a lot higher had it not been for the Durbin Amendment when you take inflation into account, and the truth is that there is no clean way of determining who is right. It is suspicious, though, that only 3% of merchants responding to a survey conducted in the months leading up to the Durbin Amendment’s enactment said that they planned to lower prices as a result of the law. 

Consumers are also seeing costs rise as a result of new checking account fees and are faced with the challenge of figuring out how to save money. If they decide to go the prepaid card route, they’ll have to figure out how to get along without a checkbook and make sense out of a plethora of different fees.

Ultimately, it seems that the Durbin Amendment has sparked a lot of change in the payments industry, just not the kind that regulators and consumers had hoped for. This, of course, could change if, rather than instituting price controls, legislators and regulators focus more on trying to create a truly competitive market.  They started down that road by including provisions in the Durbin Amendment that give merchants the freedom to decline credit cards for purchases under $10 as well as provide discounts to customers who pay with certain payment methods.

Now it’s time to finish the job.  By giving merchants the ability to provide discounts and assess surcharges according to card network as well as payment type, regulators would foster a truly competitive environment. Costs for merchants – and, eventually, consumers – will naturally decline.

Odysseas Papadimitriou is the founder and chief executive of Evolution Finance, the parent company for Card Hub, a website that helps people shop for credit cards, and Wallet Hub, a personal finance social network. Papadimitriou previously worked at Capital One for nearly eight years.

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Comments (1)
Spot on article. And while consumers may not have seen the change they were told to expect, the true reason Durbin championed this can be found in your paragraph 5: "...the law effectively robbed banks of roughly $8.4 billion in annual revenue..."

That's what mattered here. Set up banks in the public's eye as the root of all evil, punish them without regard to fairness or impact, reap votes from the citizenry and praise from the media. Mission accomplished.
Posted by My 2 Cents | Tuesday, November 13 2012 at 3:55PM ET
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