Despite the best efforts of large banks, the restriction on debit card interchange fees, originally set forth by the Durbin Amendment to the Dodd-Frank Wall Street Reform and Consumer Protection Act, remains on schedule to take effect July 21.
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This legislation gives the Federal Reserve the power to cap the fees merchants must pay banks each time a debit card is swiped at their stores. The Feds proposed cap of 12 cents per transaction stands to cost large banks $14 billion in revenue annually, according to a study conducted by Card Hub.
So what will ultimately become of this legislation given its two major loopholes--prepaid cards and debit cards issued by banks with less than $10 billion in assets-- were excluded?
The Durbin Amendment is intended to lower the financial burden on merchants, which--in theory at least, will lead to lower prices for consumers. However, its true effect will be much different. The law, as it currently stands, will have four main implications.
First, in response to the significant revenue loss expected for large banks, these institutions will not only begin offering more prepaid cards, but also encourage their customers to replace their checking accounts with these products. Further evidence for this is the fact that both Capital One (NYSE: COF) and American Express (NYSE: AMX) have added prepaid cards to their arsenals.
Second, rewards credit cards will gain market share as it becomes increasingly obvious to consumers that debit card rewards pale in comparison. Banks will also push rewards credit card offers hard because their lack of regulation means higher profits.
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Third, small banks will be able to offer relatively attractive debit cards and will therefore increase their own market share. This in turn, will add to dissolution of the amendments intended effect. The more unregulated debit cards that hit the market, the less relevant the interchange fee cap will be to merchants bottom lines.
Fourth, banks have and will continue to increase checking account fees, not only as a way to recoup lost interchange fee revenue, but also in order to increase profitability. Banks have begun attaching monthly fees between $4 and $10 to their checking accounts, meaning such accounts now reap up to $120 per customer annually. Compare this to the roughly $27 per customer the Durbin Amendment will cost banks, according to a Card Hub study, and its obvious that financial institutions are making a big batch of lemonade out of the lemons Congress handed them.
Ultimately, the Durbin Amendments impact will be negligible at best. Each of the above factors will merely result in the eradication of traditional debit cards, the only products included within the scope of the legislation. Therefore, instead of helping relieve the fiscal pressure on merchants and consumers, the Durbin Amendments legacy appears as if it will be the mere restructuring of the payment landscape. Unless, of course, Minnesota-based TCF National Bank wins its lawsuit against Federal Reserve Chairman Ben S. Bernanke and the Federal Reserve Board of Governors. This suit questions the constitutionality of the Durbin Amendments application to only large banks, saying that it puts such banks at a disadvantage and possibly violates equal protection laws. Should it succeed, the Durbin Amendment might not have much of a legacy at all.
Odysseas Papadimitriou is the CEO of Card Hub, an online marketplace for credit card deals.