Saturday, October 15, 2011

Durbin Amendment Will Make You Give Up Your Debit Card

While the Occupiers of Wall Street are blaming big business and banks for corporate greed, it is important not to shoot the messenger, but rather, go to the source of the problem. One of the complaints from the protesters is the high fees imposed by the banks. Recently, banks are charging customer a fee to use his/her debit-card. Everybody must understand that the fee was due to the Durbin Amendment that took effect in Oct. 1, 2011. As part of the Durbin Amendment that 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. It means retail business owners aren't charge a crazy fee if a debt-card being used. In order for the banks to recoup the loss, they are charging individuals for using their debt-card. This is a perfect example how government intervention will ultimate affect the American people.

(Fox Business) It's a proposal from Illinois Senator Dick Durbin that was part of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. The provisions of the Durbin Amendment become law on Oct. 1, 2011. The new law will reduce, by nearly 50%, the average amount that retailers pay for debit card transactions (often called interchange fees or swipe fees).

Retail businesses have been paying banks an average of 44 cents every time a debit card transaction goes through. Effective Oct. 1, the Federal Reserve will limit the transaction fee to no more than 21 cents, plus 0.05% of the transaction (2 cents average), plus 1 cent for issuers that have fraud-prevention standards in place. This hasn't affected credit cards; banks have been getting, and will continue to get, almost 2% of each transaction price.

Why anyone besides Senator Durbin should care

Well, since the new law cuts debit card fees in half, banks are going to be earning considerably less from debit card transactions. To make up the shortfall, they appear to be following two main strategies:

1) Lob fees onto the consumer to make up for the shrinking of debit card revenue

2) Offer more rewards and perks on credit cards to make them more attractive and to increase credit card revenue

Banks are now likely to find credit cards much more profitable under the new law, due to that aforementioned 2% of the purchase price per transaction. For purchases over $10.50, on average, the credit card issuer will make more in fees if you use a credit card instead of a debit card.

Whether the new law is a good thing depends on where you stand, and your point of view of the financial world. A few weeks ago, Sen. Durbin spoke to a group of reporters in Nashville and explained his reasoning: "The retailer will be more profitable. That's what's behind this." Durbin said that the amendment was designed to protect retailers such as gas stations, for instance, who often lose a lot of their profit to debit cards.

Durbin added that retailers were likely to pass on their profits to their customers, at least those retailers who are competitively trying to entice you into their stores.

So the law, whether it works out this way or not, was designed to protect not only consumers, since arguably lower interchange fees should result in lower prices for products and services, but also business owners, especially mom-and-pop operations who depend on numerous small transactions to survive.

The consensus among bankers, however, has been that retailers aren't likely to pass on the savings to consumers because, well, business folk are only human, and they'll want to keep the profit. That would mean that consumers will get nothing out of the Durbin Amendment.

Meanwhile, according to Bloomberg, a Janney Montgomery Scott analyst predicted that Visa and MasterCard will increase fees on what the retailers pay the credit card issuers for "small-ticket purchases." For example, on a $2 purchase, the fee would increase from 8 cents to 23 cents--over 10% of the purchase. (If you're suddenly confused, recall that merchants not only pay a fee to your bank every time you swipe your debit card, but also to the payment network used to transfer the payment, generally either Visa or MasterCard.)

If that happens, merchants may react by refusing to accept Visa-branded debit cards for smaller purchases. You might then decide to use your credit card for those minor purchases, like a bag of chips or a daily DVD rental…potentially adding to your revolving debt burden.