The Durbin Amendment to Dodd Frank financial reform legislation passed in the wake of the Great Recession eliminated debit card interchange as a source of profit for banks and payment networks. It was a huge giveaway to the retail lobby, requiring a service to be provided at around cost. And it had detrimental effects on consumers.
I’d call it an ‘unintended consequence’ but it was entirely predictable and predicted: many people lost access to traditional banking services. When they could earn money on debit cards, more banks offered fee-free checking accounts knowing that their costs would be covered by consumers making debit payments from those accounts. When debit charges were no longer profitable, it became more common for banks to require minimum direct deposits or other hurdles to avoid banking fees in order to screen out unprofitable customers. That pushed more consumers to costlier alternatives like check cashing stores.
Now retailers complain that the cost of processing debit transactions has fallen since price caps were put into place in 2011. They’re suing. And the Federal Reserve has responded by considering new rules to lower debit interchange again.
Today, merchants pay large card issuers 21 cents plus 0.05% of the transaction amount, the level set by the Fed in 2011. The Fed can lower the cap if it determines the costs for processing debit-card payments are declining, but it has never done so.
The Fed on Tuesday said it would hold a meeting next week to vote on a proposal about revising the fee cap, without being more specific. The proposal would lower the cap, according to people familiar with the matter.
The Fed would then start a public-comment period that would likely include heavy lobbying from card issuers and merchants and congressional discussion. It would require a final vote by the central bank’s governors to be implemented.
Retail lobbyists don’t press the federal government to require them to lower prices when the cost of a given product falls.
Relevant to readers, caps on debit interchange are why we no longer earn rewards on most debit card transactions. They used to award miles almost as richly as credit cards. However small banks aren’t subject to the cap, and so are certain prepaid cards, which is why fintechs generally partner with smaller financial institutions on debit products.
If retailers are correct that banks are again earning a return on debit transactions, then the law certainly provides for the Fed to squash this. However we’ve seen the detrimental effects of doing so, where banks no longer serve customers when they don’t generate this profit and aren’t profitable in other ways.
Prior to the Durbin amendment, 76% of checking accounts were free. That declined to 39% in 2012 after the rollout of the Durbin amendment and recovered slightly to 46% in 2022. Cramming down the debit revenue stream for banks will certainly benefit retailers, but we’ve seen that it isn’t paid for entirely by banks but by consumers through higher fees.
(HT: @crucker)
With technology moving forward, the cost of processing the payment would only go down. Eventually, the processing fees charged by CC and banks for debit cards will be targeted by business competitors. So it is not a question if but when.
If the Admin and Congress wanted to make it so, they could mandate that for banks to be licensed as banks and have access to federal facilities for the bank and the bank customers then the bank must offer and make available fee-free current accounts to the general public without conditioning it on account balance or account use of the sort that would be a burden on the most indigent of Americans.
@ Gary – I don’t understand why anyone ever uses debit cards. If your account is compromised when using a credit card, the Bank’s money is stolen, not yours With a debit card, your money is stolen and potentially frozen or gone. Plus, why would anyone with good credit forgo credit card rewards? Finally, screw banks, and get a free checking account from a credit union.
A lot of people have such bad credit that credit cards are no good option. Some people are against borrowing with interest due and thus don’t want in on credit cards. Some people like simplicity of having fewer accounts to monitor and find a $0-$50 liability risk on debit card use to be better than having more than the minimum needed accounts to monitor.
@Gene / that is the general rule but some banks (like mine w my Bank of America referred account) protect debit card transactions similar to how credit cards are treated. Yes money can come out of the account but then be credited back.
That being said, I rarely use my debit card anymore. I out practically everything on credit cards to get points, miles or cash back then pay them all every month.
Off topic a bit, but back at the time when “Dodd-Frank” was passed, what I found disgusting about the whole thing was Dodd and Frank were held up as heroes fixing a broken system — they were on every Sunday morning news show, followed by reporters, praised for their effort.
But they were the ones who played a large part in creating the mess.
This is an aviation and travel blog. I’m trying to figure out why the author is talking about banks and political beliefs.
@WN Traveler – “caps on debit interchange are why we no longer earn rewards on most debit card transactions. They used to award miles almost as richly as credit cards. However small banks aren’t subject to the cap, and so are certain prepaid cards, which is why fintechs generally partner with smaller financial institutions on debit products.”
Tell us the percentage of airline loyalty cards that are debit vs credit and I am sure the number is small. You get on tangents and justify your position that it has airline connections that you know about when you are typically just on a tear.
There were more airline debit cards in the US back before Dodd-Frank: Citi with AA and think it was a Suntrust account with DL
Why are you posting a picture of my debit card here??
So, everyone should join a credit union?
PenFed has some reasonably good products. Joined that and a few other federal government-related federal credit unions years ago.
@FrequentWanderer – regulations don’t exactly make that easy, though, do they?
@FrequentWanderer – yes.
I own stock in Citi and Bank of America. I keep my money in a credit union.
Banks are predatory, and great for making g shareholders returns.
Hell, my former C.U. in Michigan used to send me an annual profit sharing check… just because I was a member!
Of course, that’s socialism for ya. Seizing the means of production and all that. 😉
As a business man I call BS. The cost of transferring cash is a lot more expensive. A Gas Station cashier has never been held at gun point with “Give me all your credit card receipts” Foxwood casino has never been robbed of their “cards” when the senior citizens drop $500 in a night into the one arm bandits. . A Retail store manager has never been shot when transferring the daily receipts from Bank 1 to bank 2
Does anyone write a check any more? (For that matter can anyone under 40 write in script) I know one employee who wants a check each week so she can go to the bank to deposit it. Loved the day that she got her check at 5pm on Wednesday, had a blizzard on Thursday & Friday she was not able to get to the bank until Monday….. ha ha ..
I like my points and status and upgrades as well as anyone else, but the reality is that rewards programs are a subsidy for the rich who get the points, paid by everyone else who uses a credit card. The EU limits swipe fees to 0.2% for debit, 0.3% for credit, and the world has not ended. There are a lot fewer co-branded cards in the EU which I do not see as a problem.
As to checks, they’re a relic due to our creaky internal payment systems. Nobody uses them outside North America, and with the rollout of FedNow I expect a lot fewer people to be using them here.