As part of the Durbin Amendment—put into law in July 2010—the Federal Reserve gained regulatory power over the interchange fees banks can charge business owners every time a debit card is used in their stores. In addition, merchants now have the ability to provide discounts for cash purchases, which have lower processing costs than do credit and checking payment types.
These changes were instituted as means of creating merchant savings, so as to relieve some of the pressure placed on the industry by the Great Recession. In addition, the merchant savings conferred by the law are theoretically supposed to translate into lower prices for consumers, thereby benefiting them as well. While merchants, and possibly consumers, stand to save in the short-term, their savings will only be short-lived. Numerous market forces are expected to eventually mitigate these benefits and make a restructuring of the debit card market as well as an increasing reliance on prepaid cards the Durbin Amendment’s lasting consequences.
A recent Debit Card Interchange Fee Study conducted by CardHub.com estimates that Fed regulation will lower debit card interchange fees anywhere from 20%-50%, causing bank revenue to fall between $3.6 billion and $9.1 billion. Banks will most certainly react to these potential losses and are expected to do so by increasing fees associated with debit cards while lowering their benefits. This, in turn, will result in a widening of the rewards disparity between credit cards and debit cards, effectively promoting the use of rewards credit cards, which have unregulated interchange fees.
Similarly, because prepaid cards are unregulated by the Durbin Amendment and have the same capabilities as debit cards—except for the capacity to write paper checks—banks are likely to market them as replacements for debit cards. This concerted bank influence will effectively serve to diminish debit card use and cause a rise in that of prepaid cards.
Like prepaid cards, banks with less than $10 billion in assets are also excluded by the Durbin Amendment. Thus, these organisations will be able to offer unregulated and thus more commercially appealing debit cards than their larger counterparts and will gain an increased share of the depressed marketplace.
As a result of bank reaction to potential losses and the loopholes inherent within the legislation, unregulated credit and check card options will quickly overtake regulated debit cards. In addition, this market shift will also negate any merchant or consumer cost benefits and will essentially turn the Durbin Amendment’s main point moot.
In order for the Durbin Amendment to have truly succeeded, it should have merely allowed merchants to offer both discounts and surcharges between both payment networks and payment types. Within this construct, a merchant could, for example, offer a 1% discount for a Visa prepaid card while at the same time assessing a surcharge on any purchase made with an American Express credit card and leaving the price unaltered for charges made with a MasterCard credit card. This would have created the most beneficial payment landscape possible for merchants because networks and card types would both need to compete for merchant preference.
This article was written by Odysseas Papadimitriou, CEO and Founder of CardHub.com, a website that helps consumers compare credit cards.
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