November 4 2010|05.00 PM UTC

Fonda Chen

Deciphering Durbin, the Newest Card Legislation: Is Your Debit Card About To Be Freed Up from So Many Fees?

Category: Credit, Personal Finance, SRTags: , , ,

Plastic may be easy and convenient, but reading and understanding card policies and federal legislative bills are anything but. (This year’s Dodd-Frank Bill and its 400+ amendments checks in at a whopping 2300 pages.)

Fortunately, the federal government created the Credit CARD Act of 2009 to make card policies easier to understand and to end some of the unfair and deceptive credit card company practices. Thanks to those efforts, credit issuers are now a bit more consumer friendly due to limitations placed on the way they increase fees, apply payments to debt, and much more.

The CARD Act successfully curbed some credit abuses, but what about debit cards? Many people are breaking their dependency upon credit by using debit cards. Now almost 2x as many Americans use debit as credit—but fees come with debit, too.

Consumers Use Debit Cards Like Cash

Image Source: and GfK Custom Research

Every time you swipe with plastic, whether credit or debit, the card network charges the merchant a fee; then the merchant has to make up for that fee in part by raising prices on products and services. In other words, while we may not see that surcharge fee on our bill, merchants are most certainly passing along the cost of interchange fees to customers.

Card networks charge merchants as much as they feel the market can handle. Because VISA and MasterCard have 80% hold of that entire $20 billion a year debit fee business, they can—and do—choose to charge merchants quite a bit (Nilson Report, August 2009). The average swipe fee, or interchange fee as it is called. That’s a lot in fees to try making up in sales.

Senator Durbin (D-IL) wants the government to start regulating swipe fees to encourage competition; in turn, merchants may choose to pass along these savings to consumers. And so the Durbin Interchange Amendment was born. Tacked onto the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act without debate, the amendment establishes that the Federal Reserve will start regulating electronic debit transaction fees in July 2011, making them more “reasonable” and “proportional to the costs of actually processing a transaction.” Additionally merchants will be able to run debit transactions on any card network as well as steer customers toward cash or debit by offering discounts for those payment forms and (legally) allow retailers to set a $10 minimum on card purchases.

These potential fees would be acceptable if consumers could then make up for additional payments to banks with savings in stores.

Banks, of course, are not at all excited about this, especially since they were looking at debit fees to help offset revenue losses caused by the CARD Act. Bank of America detailed the impact of the Durbin amendment and explained that the measure would cut 60%–80% of their $2.9 billion dollar debit card fee business. Additionally, last month TCF National Bank filed a lawsuit against the Federal Reserve to challenge the amendment. TCF makes more than 10% of its revenue from interchange fees.

It was originally thought that the Durbin amendment might help regional banks by leveling the playing field against the big banks like JPMorgan Chase and B of A. However, major regional players such as Regions Financial, KeyBank and Fifth Third reported that they generate more than 3% of their overall revenue from interchange fees, compared to Bank of America’s 2%.

So what does this mean for you? Well, as we anticipated before the enactment of the CARD Act, the loss of revenue from credit cards has motivated banks to come up with creative new ways to find new profits elsewhere (See “10 Loopholes The CARD Act Didn’t Close”).

Essentially, a decrease in interchange fees will mean a decrease in consumer rewards. Additionally, banks are charging consumers increased checking account fees and new per-transaction fees. Additionally, ATM surcharges hit new highs in 2010. The average ATM surcharge—the fee charged at the ATM if you get cash from another bank than your own—increased 5%, from $2.22 to $2.33.

So while the Fed and the banks duke it out on interchange fees, safeguard yourself now by watching out for new fees and staying on top of the ever-changing card rates, rewards and payment policies. If you carry credit card debt, look into switching to a card with a lower interest rate, no annual fees and low balance transfer fees. Find the best credit card for your lifestyle by calculating the total cost of ownership for each card, including fees and rewards.

For more tips and tricks, please visit our blog Shrinkage is Good. You’ll find articles like
10 Loopholes The CARD Act Didn’t Close
Is Free Checking a Thing of the Past?
The Credit C.A.R.D. Act of 2009

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{ 3 comments… read them below or add one }

Tim November 4, 2010 at 9:10 pm

Thanks for this–very informative and easy to read!


Sung Seets November 9, 2010 at 6:04 am

OK this really does make a lot of sense dude. Wow.


Nicole March 28, 2011 at 7:31 am

I am glad to see this explained so I can understand it. But what I never understand is how they expect to regulate that the merchants are actually lowering thier prices and not just collecting extra profit. meanwhile now I loose those rewards that were helping to pay for groceries, gas etc. I think that was a good incentive not to use credit cards.


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