A closer look at the "Durbin Amendment" debit card interchange rule

On May 26, 2011 Moneycation posted an entry about the Debit Card Rule. On May 14, 2011 the 'Durbin rule', named after the Senator from Illinois passed the Senate as a provision within the Dodd-Frank Wall Street Reform and Consumer Protection Act according to the Washington Post. It is to be implemented by the Federal Reserve Bank.

An interesting piece of information about this rule is if a bank or credit union has assets under $10 billion, they are exempt from the rule which places restrictions on fees charged during retail debt card transactions. What previously cost merchants 1.5 percent in 'interchange fees' i.e. debit card transaction costs could now only cost .12 cents per transaction

Despite the exemption, the rule was still challenged which raises an eyebrow. Why challenge something if there is an exemption? A closer look at the rule shows the exemption may be unenforceable due to a mandatory choice of transaction networks according to Nerd Wallet. In other words, if there is a choice between an exempt network and a cheaper one, merchants can choose the latter depriving banks or credit unions of transaction fees.

Essentially, if merchants will in fact have a choice of networks, credit unions and banks are concerned they will not earn enough to prevent fraud due to a lack of financing. Since its original approval a delay on the implementation of the Durbin Amendment has been forgone. The result consumers may face include potential banking fees for services that were previously free, minimum card purchase requirements or surcharges.

If fees are implemented on individual banking accounts a return to cash transactions or alternate payment methods may bypass debit card minimum purchase rules and possibly even checking account fees. Consumers are capable of lowering their expenses as well which makes the interchange fee change seem more like a mere re-shuffling of costs in favor of retailers.

Is the "Debit Card Rule" a good Idea?

In December of 2010 The Federal Reserve Board issued a press release that proposed balancing the cost of debit card transactions paid by retailers with costs required of card issuers. This is evident in the following excerpt from that press release:

 "The proposed new Regulation II, Debit-Card Interchange Fees and Routing, would establish standards for determining whether a debit card interchange fee received by a card issuer is reasonable and proportional to the cost incurred by the issuer for the transaction."

In response to this proposed rule, the Electronic Payment Coalition initiated a campaign to delay the implementation of this rule. The reasoning of the coalition is costs would be incurred by small financial institutions and debit card users to their disadvantage. This is because a bank or credit union may be considered a card issuer according to Bankers Online in reference to the Truth in Lending Act.

A question to ask when considering this issue is whether or not the motive of the rule is to establish a fairer or more balanced cost structure, or whether it is motivated by the intention to simply benefit retailers with lower costs.

Since the Federal Reserve Board is an economic regulator, the economic affect of this rule should be considered. If costs go up for small financial institutions and debit card users via higher fees, that could impact consumer spending. Moreover, if those financial institutions are required to initiate checking account and other fees to pay for debit card transactions costs, they may have less to spend in the economy. 

Lower consumer spending also impacts retailers so the reasoning for the rule may be circular.  In light of this it would seem the economic impact of the rule should be studied carefully,