Senator Dick Durbin is a Democrat from Springfield Illinois. As the Assistant Majority Leader, he holds the second highest ranking position in the U.S. Senate. He authored the Durbin Amendment to the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. His amendment went into effect during October of 2011. Since then, there have been no shortage of claims that the small merchant is hurt, the bank is being hurt and the consumer is being hurt. All three cannot be hurt at the same time, so something is wrong.
The problem with the Durbin Amendment was that attempting to price fix bank/merchant arrangements left giant loopholes for the banks to retaliate against their own customers by raising banking fees or cutting back on perks and free services. Merchants that were supposed to pass their savings from lowered debit card transaction fees to the customers failed to live up to the promise.
Consumers got the squeeze. They ended up both with the same prices, new bank fees, and the end to free services.
One prediction was that banks would charge annual debit card, checking account and other fees if they could not continue to reap huge profits by charging merchants excessive fees. Some consumers were able to put the squeeze on major banks by moving to credit unions and letting banks know that only so much would be tolerated, but small businesses and low to moderate income consumers are the ones who have suffered the most.
The Heritage Network considers that the Durbin Amendment was damaging because the banks continue to carry out threats to recover the huge profits at their own customer’s expense.
Merchants Services illustrates the plots and ploys by the banks to recover the billions in lost revenue from the fees and considers the damage from the Durbin Amendment,
““The banks, not wanting to take a $9 to $10 billion dollar loss in revenues for the year, will simply add fees to other payment options or get rid of premiums and extras that they had been offering.” We also stated:“Higher fees on checking accounts and the removal of debit card rewards programs were suggested as a response banks would have.”
Politico also considers the amendment to be a disaster for consumers.
The goals of the amendment that are awaiting input by the Federal Reserve are,
A cap of 7 to 12 cents on most debit card swipe fees, or fees that are charged every time a debit card is used on a machine. This represented a price drop of about 80% from previous charges. This fee was for protection against fraud and other problems with merchant transactions. It became a huge profit center for the banks, allowing the banks to give free checking and other perks to the banking customers. The long term effect will be fewer free checking, premium services, and other banking perks.
There is no long term effect for the nation’s 7,000 credit unions. All but three of them are exempt and can continue to charge the swipe fees because they have less than $10 billion in assets.
Merchants, however, had the option of eating the fees or of passing on the missing card fees in the form of a surcharge to the consumer. Consumers have the ability to go to a merchant who will not add the surcharge, which introduces the idea of competition.
Merchants have a choice as to which debit network they process transactions over. Past agreements forced merchants to process many Visa transactions over the STAR network, but competitors like PULSE and NYCE were offering to process the same transactions at a lower price.
Goals that have been in effect are,
Visa and MasterCard used to ban the merchant’s practice of setting a minimum of $10 on credit card transactions. This provision was in the bank’s merchant agreements. Now the merchants can impose the minimum.
Visa and MasterCard used to ban merchant’s practice of giving discounts at the cash register when customers used the cards. Now merchants can give the discount. But merchants can also decline to give the discounts. Customers will leave and go to other merchants, introducing the concept of competition.
In the end, if merchants refuse to pass on discounts from lowered merchant transaction fees and the banks add fees to services that were formerly financed by the swipe fees, then the consumer will lose billions in the long term. The true problem was in allowing Visa and MasterCard to hold monopolies, and in leaving loopholes for the banks and merchants to squeeze the consumer even harder than ever before.