Making Sense of the Durbin Amendment

Payments Leader

Posted on November 5, 2013


When the Dodd-Frank Act passed in 2010, the changes that accompanied it rocked this country’s financial landscape. However, the Durbin Amendment, tacked on to the Dodd-Frank Act and passed in 2011, has been the subject of a recent ruling by Judge Richard Leon that might send even more tremors through Financial Institutions (FIs). As you recall, the original passing of the Durbin Amendment set a cap on the interchange fees, a major source of revenue, FIs could assess on debit card transactions. Simply put, the Amendment broke down this way:

  • An FI with assets of $10 billion or more had these transactions capped at 23.9 cents per transaction.
  • FIs with assets below $10 billion had no cap placed on these transactions.
  • Two unaffiliated networks must process debit card transactions.

The basic thrust behind Durbin was to ensure that interchange fees were both reasonable and proportional when compared to card issuers’ costs. In pre-Durbin days, the average fee collected for swiping a debit card was 44 cents, minus the cost of providing processing, security and anti-fraud protection. Durbin wanted that dropped to a range of 7-12 cents per swipe, a significant decrease to say the least.

In the two years since the Amendment initially passed, there has been much maneuvering and an analysis in trying to put in place the controls the Federal Reserve believed that Durbin mandated. This all ended on July 31st when Judge Leon ruled that the Federal Reserve had misinterpreted the intent of Durbin when it announced its own rules for the interchange fee cap. The judge also wants the Federal Reserve to go back to the drawing board and implement rules more in line with the spirit of the Durbin Amendment.

So what‘s a Financial Institution (FI) to do? As of right now, the Federal Reserve is appealing this ruling and everyone and everything is in a ‘wait-and-see-what’s-next’ mode. Today, every time a customer uses a debit card, that transaction helps the FI make money. If that changes tomorrow, the end result would likely be as drastic as debit card issuers could exit the debit field completely. Think about it: Without the promise of what FIs consider a fair revenue stream, there is little to no incentive to call FIs to extend their debit card programs. This means zero debit card transactions and zero transactions means an end to debit card programs as they fade away into the sunset. That’s just one alternative, however.

durbin amendment for financial institutions

Another is to remake the debit card program, transforming a free product into a high-end product, perhaps by tagging the card with an annual fee. As for other alternatives, necessity is indeed the mother of invention and with the necessity to replace the revenues from transaction fees, more creative ideas might be in the offing.

The best course of action for FIs remains this: Don’t wait for the ruling to go through. Right now, take a decisive action such as adding features and function. Here’s an example: Tie the debit offering to a mobile or loyalty solution, add incremental function to the existing solution and charge a fee. This gets your consumer base within the FI portfolio aligned with the idea of paying a fee for having a debit card. Do this in advance of Durbin’s final solution implementation and you’ll reap the benefits of a consumer base already accustomed to paying the debit card fee. You can then adjust or modify the fee according to the new interchange fee level and try to maintain your existing revenue streams. Here is how such a strategy shakes out in terms of results:

  • The market willingly accepts the fee based upon incremental feature & function.
  • Any consumers that leave will likely be customers who under-perform for you, and who are also likely at the low end of the transaction rate & low performing customers.
  • You’ve effectively protecting your revenue base with the fee while simultaneously continuing to allow your consumers effect transactions against the existing Demand Deposit Account balance as they are paying with “their money”.

If you do the above, also consider integrating the younger generation into your portfolio, while aligning with the right payments partner offering a broad suite of products. Think about solutions like a mobile enabled prepaid card that resonates with the younger demographic. This can help you keep your debit base while effectively augmenting your current portfolio and most importantly keep them as customers of your FI.

There are other effective strategies, and new innovations are always just around the corner. They key concept to keep top-of-mind is this: Don’t wait; take decisive but smart action!

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Payments Leader

Payments Leader from FIS provides insights on credit, loyalty, fraud and emerging payments strategies through blog posts from our industry experienced authors.