Federal Reserve Issues Interchange Rules Under Durbin AmendmentSeptember 23, 2011 | David Brown, Esq.
On June 29, 2011, the Federal Reserve Board issued its final regulations on debit card interchange, or swipe fees, that will deeply impact banks, merchants and anyone who holds a debit card.1 Some of you might be asking, “what’s an interchange fee?” An interchange fee is the charge assessed on a merchant every time someone swipes their debit or credit card. The fee varies widely, depending on the card and the merchant. The fee is levied to offset the cost of fraud prevention and processing the transaction. Fraudulent charges on debit cards are relatively small, so they command lower swipe fees; signature cards, which include credit cards and debit cards that allow consumers to sign instead of entering a four digit PIN, have the largest swipe fees, since they often have the highest credit limits and are more likely to be subject to fraud. Larger merchants, such as Wal-Mart and Target, have more bargaining power and can negotiate lower swipe fees, but smaller mom-and-pop stores are forced to accept higher charges.2
Two major card networks, Visa and MasterCard, have a virtual duopoly on debit card transactions and can dictate the interchange fees that are charged. A portion of the fee is paid to the network, while another part is distributed to the bank that issued the debit, or credit card. Swipe fees typically represent about 2% of the total sale and have risen substantially in the past decade. Today, debit card swipe fees average 44 cents per transaction – translating to approximately $17 billion a year.3
Pursuant to the new rules promulgated by the Federal Reserve, interchange fees for all debit card transactions (“PIN-based debit” and “signature debit”) will soon be capped at 21 cents plus a component of 5 basis points based on the value of the transaction.4 For a transaction of $38.00, which the Fed estimates to be the average, the interchange fee would come out to 24 cents.5 The 21 cents plus 5 basis points serves as a de facto “safe harbor” – a debit card transaction interchange fee that does not exceed this threshold is conclusively reasonable and proportional. The 21-cent cap will go into effect on October 1, 2011.6 Issuers that comply with certain standards outlined by the Federal Reserve Board may be entitled to an additional 1-cent per transaction “fraud prevention adjustment”.7 Interestingly, the new rules also require issuers to allow each debit transaction to be processed on at least two unaffiliated networks.8 The final ruling reflects substantial changes from those proposed earlier this year when the Fed suggested a strict 12-cent cap and an implementation date of July 21st.9
The consequences of the Fed’s new rules are still unknown. Most experts agree that banks will be forced to levy new fees on checking accounts, raise minimum balance requirements and end debit rewards programs. After all, debit cards are significantly less lucrative for banks now. Financial institutions will probably try to push customers toward credit cards and prepaid debit cards, which escaped interchange fee regulation. Retailers in competitive, low-margin sectors are expected to drive down prices, but those in less competitive sectors will probably pocket their savings. Certainly, wealthy individuals with excellent credit stand to benefit the most as they will be able to take advantage of unprecedented rewards bonuses as well as potentially lower prices. Those who cannot qualify for, or want to avoid, credit cards will be forced to pay more for checking accounts.10
1 Chen, Tim, What the Durbin Amendment Means for You, My Money, July 12, 2011, http://money.usnews.com/money/blogs/my-money/2011/07/12/what-the-durbin-amendment-means-for-you (hereafter “Chen, Tim 1”); see also Alston & Bird LLP, Federal Reserve Board issues final rule to implement Durbin Amendment, June 30, 2011, http://www.alston.com/files/Publication/6bd342e6-66dc-44f4-91e9-dbb9738b10a0/Presentation/PublicationAttachment/931840c6-037e-47ca-b79b-5a2612622a1e/DurbinAmendmentRegs.pdf
2 Chen, Tim 1, supra.
3 Id.; see also Mattingly, Phil and Robert Schmidt, How Wal-Mart Swiped JPMorgan in $16 Billion Debit-Card Lobbying Battle, Bloomberg, June 28, 2011, http://www.bloomberg.com/news/2011-06-28/how-wal-mart-swiped-jpmorgan-in-16-billion-debit-card-battle.html.
4 Alston & Bird LLP, supra.; Practical eCommerce Staff, Understanding the New ‘Durbin’ Debit Card Rates; Exec Explains, Practical Ecommerce, July 8, 2011, http://www.practicalecommerce.com/articles/2889-Understanding-the-New-Durbin-Debit-Card-Rates-Exec-Explains
5 Anisha, Federal Reserve Issues Final Ruling on Durbin Amendment, nerdwallet, June 29, 2011, http://www.nerdwallet.com/blog/2011/federal-reserve-issues-final-ruling-durbin-amendment/.
6 Chen, Tim, Banks Should Love the Fed’s Durbin Amendment Ruling, Money Builder: Making Sense of your Finances, July 12, 2011, http://blogs.forbes.com/moneybuilder/2011/07/12/banks-should-love-the-feds-durbin-amendment-ruling/ (hereafter “Chen, Tim 2”).
7 Alston & Bird LLP, supra.
8 Chen, Tim 2, supra.
10 Chen, Tim 1, supra.
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