The Durbin Amendment is an addendum to the 2010 Dodd-Frank Financial Reform and Consumer Protection Act. Its primary function is to cap fees related to retail debit transactions in order to lower retail costs and spur economic growth. To establish the new standards, the Federal Reserve was granted expanded powers over interchange fees. The new regulations came into effect on October 1, 2011.
Regulations
Under the Durbin Amendment, the maximum interchange fee from a single debit card transaction is now 21 cents plus 0.05% of the transaction. Insurers which have fraud-prevention standards may also charge an additional penny per transaction to cover the cost of fraud prevention.
Restrictions
Small banks with less than $10 billion in assets are exempt from the Durbin Amendment. This could be a competitive edge for small banks, because most larger banks are raising other banking-related fees or discontinuing debit loyalty programs to make up the difference lost to lower debit transaction fees.
The Durbin Amendment does not cover credit card transactions. The transaction cost on these transactions currently ranges between 2-4%. VISA has already confirmed that it will introduce a new payment processing fee in April 2012, which will circumvent the Durbin regulations. Mastercard may follow suit in the summer of 2012.
Analysis
There is no requirement for retailers to pass on the transaction savings to consumers. As a result, the consumer may see no difference in retail price.
Because part of the cap is based on the size of the transaction, high-end retailers with higher individual retail interactions may benefit more from the Durbin Amendment than smaller retailers. The exact difference depends on the degree to which a retailer depends on debit transactions, and the average dollar amount of each debit transaction. In 2010, the average debit card retail transaction was $71.
A report from Javelin Strategy and Research shows that retailers who average many transactions under $11 will pay more in debit transaction fees than they did before. A typical coffee shop debit purchase of $8, which previously cost 14 cents, will cost 22 cents under the Durbin regulations. However, merchants with an average sale of $38.03 will pay only half their previous debit transaction fees.
The other Durbin Amendment
The Durbin Amendment of 2011 should not be confused with a previous Durbin Amendment to the Iraq War Resolution of 2002. That Durbin Amendment was an unsuccessful attempt to limit authorization for the use of armed force in Iraq. If it had passed, military intervention in Iraq would have ended as soon as any imminent threat from Iraqi weapons of mass destruction had been eliminated.