The Durbin Amendment’s Effect on Small and Big Businesses

​What is the Durbin Amendment?

The Durbin Amendment is an important part of the Dodd-Frank Wall Street Reform in finance. When this law was enacted in October 2011, it forced banks to reduce how much they charge customers for debit transactions (or swipe fees) however banks recouped the lost income from interchange fees by charging higher banking fees. Rather than reducing consumer costs in order to increase savings and spur economic growth, the Durbin Amendment ended up costing consumers an extra $8 billion in banking fees.

How the Durbin Amendment Affects Your Business

Before the Dodd-Frank law went into effect, banks would charge 44 cents per debit card transaction. The Federal Reserve reports that this fee enabled banks to collect over $20 billion per annum from debit interchange fees which was used to cover administrative costs and fraud prevention associated with the use of debit cards. When the Durbin Amendment came into effect in 2011, these interchange fees were capped at 24 cents for a $38 transaction, which is about 45% less than what it would have cost before.

Banks that hold assets that are worth more than $10 billion dollars are classified as exempt banks and pay a flat fee of 0.05% +$0.21 while unregulated banks (those with less than $10 billion in assets) are unregulated and pay 1.6% + $0.05. This means that after the Amendment, smaller banks were forced to pay more for debit card transactions.

On the surface it seems that these charges only affect consumers and banks however large-scale merchants may be the biggest beneficiaries of the Durbin Amendment. Proponents of the Act such as the Merchant Payments Coalition and other big-box stores reported that they are now able to charge less for goods which means they can pass a part of those profits on to consumers. Consumers are happy either way, however it seems that only big-box retailers are benefiting from the new interchange fees.

Credit Unions, small businesses and local community are unhappy with the new law because they have actually experienced an increase in their interchange fees. Such businesses were able to offer discounts on small items such as candy bars however the new law makes that impossible. Despite this fact, the Durbin Amendment has proven to lower to debit card fees even though some businesses are benefiting more than others.

Big Winners and Small Losers With the Durbin Amendment

Merchants who sell in large quantities benefit the most from this new set of laws. This is because their costs for swiping cards have been reduced by close to 50%. Prior to the Amendment coming into effect, banks and card issuers charged a variable percentage of the purchase value.

Small businesses and credit unions came out as the big losers because their small transactions were not able to absorb the benefits. Many small businesses even lost revenue on interchange fees because they used to pay approximately 5 cents in swipe fees for coffee and a sandwich but they are now forced to pay up to 25 cents for the same transaction. In some cases they have been forced to raise prices in order to recoup the losses.

Before the Durbin Amendment smaller purchases were charged less and larger purchases were charged more. This seems like a smart way to do things however the opposite is now in effect. Debit card issuers such as Visa and MasterCard took full advantage of this by charging full price for all transactions and increasing their profits from swipe fees. Small businesses are suffering more under due to the new interchange fees, and consumers may start to feel the pinch too because financial institutions are no longer able to offer incentives such as loyalty points and free checking.

Arguments For and Against the Durbin Amendment

Due to the fact that there is a great divide between those who are benefiting and those who are losing thanks to the Durbin Amendment, there has been an ongoing debate in the Senate with regards to whether the amendment should be upheld or repealed.

Although originally enacted in October 2011, a challenge to the Durbin Amendment due to breach of anti-trust laws was submitted to the Supreme Court in January of 2015. The Supreme Court refused to review the challenge however those who are against the Durbin Amendment are still pushing to have it repealed.

Texas Senator Randy Neugebauer, one of the politicians leading the charge for wall street reform and to have the bill repealed, stated in 2016 that the Durbin Amendment is a fine example of crony capitalism at its worst, with the federal government actively picking winners and losers when it comes to interchange fees. Other supporters of the movement to repeal the act state that:

  • The law is ineffective because retailers are unable to pass the cost savings from swipe fees on to consumers,
  • Community banks and credit unions are forced to pay more,
  • There is a growing number of 'unbanked consumers' due to the high costs of checking account fees and unrealistic minimum balances,
  • Banking costs have actually increased due to higher charges and disapearing debit card loyalty programs.

Those who wish to uphold the Durbin Amendment include merchant groups such as the Electronic Payments Coalition who believe that:

  • Without such regulations the intercharge costs are bound to rise,
  • The Durbin Amendment encourages innovation and competition,
  • Debit networks will be dominated by monopolies once again if the amendment is repealed.

Looking at the situation as black and white may be unwise because there are obvious benefits and drawbacks to this amendment. Neither the retailers nor the consumers want more fees to be stacked on their bill just for using payment card networks however banks still need to cover their bottom lines when offering such services. The best approach going forward may not be to outright repeal the amendment as it stands, but rather to make a few changes so that everybody's needs are taken care of.

The Durbin Amendment was drafted with the intention of boosting economic activity for small businesses. The amendment had the unfortunate result of increasing the debit interchange rates which resulted in more costs for these small businesses while allowing large businesses to thrive. Perhaps small businesses can find a way around such exorbitant fees by leaving debit card payments to the big boys and exploring other payment options such as cryptocurrencies. Bitcoin and Ethereum transaction fees are currently too high to be worth considering for small business practices however Litecoin and Dogecoin have transaction fees that are as low as $0.0076.