The Fed, exercising newly established regulatory power, announced on Dec. 16 that banks could not charge merchants interchange fees higher than 12 cents each time a debit card is used as payment at a store. This announcement, which came at a House Financial Services Committee hearing, represents a $13 billion annual revenue loss for the banking industry, according to a Debit Card Interchange Fee Study conducted by CardHub.com.
The Fed was initially granted the power to control interchange fees by the Durbin Amendment, which was put into law in July as part of the financial reform legislation passed in reaction to the Great Recession. This amendment—which also gives merchants the right to offer discounts to customers paying in cash—was intended to lower merchant costs and, in turn, create consumer savings. While, to many, it seems like a positive step toward stimulating the ailing economy, it obviously does not benefit the banking industry.
However, banks are not likely to take the projected financial hit without making compensatory maneuvers. In fact, banks have already started reacting to expected interchange fee revenue losses by raising monthly fees for checking accounts by $4-$5 while decreasing the overall rewards of their debit cards. Such changes will make debit cards relatively unattractive to consumers and will result in other, less costly options gaining favor.
Specifically, the rewards chasm that exists between debit cards and rewards credit cards will widen, resulting in greater credit card use. Prepaid cards will also begin to replace traditional checking accounts because they provide the same utility, minus the ability to write paper checks. Small bank debit cards—also unregulated by the legislation—will assume an increased share of the debit card market as well. Each of these unregulated products will grow increasingly attractive because its financial burden remains on merchants, allowing consumer fees to stay low and issuer profits to remain high.
Therefore, significant savings should not be expected for either merchants or consumers as a result of the Durbin Amendment. Banks, on the other hand, actually stand to profit off the legislation. According to Card Hub’s study, projected banking industry annual losses stemming from the Durbin Amendment will amount to roughly $27 per debit card while reactionary fees are expected to garner between $48 and $60 a year.
These unintended consequences needn’t have arisen though. Had legislators merely allowed merchants to both offer discounts and assess surcharges depending on payment type and payment network, true, long-lasting financial benefit for merchants and consumers alike would have been provided for. If for example, a store owner could give a discount to someone paying with a MasterCard credit card, charge extra for use of a Visa credit card and leave the price unaltered for an American Express card, consumers would gravitate toward the lowest cost provider, creating incentive for lower prices in the process. However, this is not what took place. Instead, we should simply be prepared for a restructuring of the payment market as a combination of banking industry reaction and narrow legislative breadth will lead the Durbin Amendment’s legacy to be far different from its intent.