Debit Fees Under Durbin: A Neverending Story?
August 5, 2013 3:00 AM
The payments industry was thrown for a loop when a judge struck down the Federal Reserve Board's cap on debit interchange fees. It was the latest twist in a long-running saga that is far from over. (Image: ShutterStock )
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The Durbin amendment, part of the Dodd-Frank Act, took aim at the fees merchants pay for accepting debit card payments. When the act passed on June 25, 2010, it gave the Federal Reserve Board nine months to set a new rate for interchange. Early estimates predicted debit-card fees would drop by 25% to 75%. Pictured: Sen. Dick Durbin (Image: Bloomberg News)
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At the end of 2010, the Federal Reserve Board proposed to cap debit fees at 12 cents , but this was just a first step. (Image: ThinkStock)
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When the Fed made its final decision, it capped debit interchange at 21 cents a transaction , showing more flexibility than expected when it initially proposed a 12-cent cap. (Image: ThinkStock)
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The Fed's decision faced challenges. Lawmakers proposed to delay the implementation of the fee caps or to repeal the Durbin amendment . And in November 2011, retailers sued the Federal Reserve Board, arguing that the Fed should have capped debit-card swipe fees at a lower rate. (Image: ThinkStock)
Some debit products had to be redesigned when their fee revenue dwindled. Chase's Disney debit card , a casualty of the Durbin amendment, originally offered points for spending. The post-Durbin version did away with reward points, instead offering discounts on Disney purchases.
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Though fees stole the spotlight, the Durbin rule also required debit cards to have competitive routing options. This helped MasterCard , which doubled the number of U.S. debit cards it could process after the regulations took effect. However, Visa said its Interlink PIN debit network suffered "notable deterioration ." (Image: Bloomberg News)
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Under the Durbin rule, processors stood to benefit from passing their savings along to merchants. Heartland Payment Systems called this practice "Durbin Dollars ." (Image: ThinkStock)
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The Durbin rule wasn't bad news for all banks. Debit issuers with assets of less than $10 billion are exempt from the cap on fees, and they used this to their advantage in pursuing new debit-card accounts from businesses. (Image: ThinkStock)
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One year later, in late 2012, what effect did the debit-fee cap have ? Few retailers overtly lowered their prices, but there was also little indication that banks had suffered. And no one was ready to declare the fight over. "The noise has not gone away by any means," an analyst said. "This has been a multi-decade struggle." (Image: ThinkStock)
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Retailers got their day in court last October, when Judge Richard J. Leon began hearing arguments from criticizing the Fed's chosen fee cap. Retailers were encouraged by Leon's record in overturning an earlier FDA decision, but "as a strong rule of thumb, courts will defer to the expertise of bank regulators," one consultant said. (Image: ThinkStock)
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On July 31, Judge Leon declared that the Fed overstepped its authority in how it arrived at the debit-fee cap. This result "was like a Hail Mary pass for the retailers and it connected," one expert says. (Image: ThinkStock)
Judge Leon's ruling also complicates another aspect of the Durbin rule: the requirement to provide more than one routing option . Even before the ruling, this was an issue the card brands and debit networks struggled to resolve as they migrate to EMV-chip cards. (Image: ThinkStock)
