Early this year, my bank sent me a letter announcing the end of its debit rewards program. It’s one of a handful of letters I’ve received that referenced “new legislation” and outlined a slight change in the way my account works. I read it, raised my eyebrows, and tossed it. These sorts of letters keep coming, and as long as they don’t spell out interest rate increases or new fees, I disregard them. But debit rewards programs were one of the few perks of my big bank that seemed good for me, so what gives?
The Durbin Amendment
The Durbin Amendment was attached to the Dodd-Frank Wall Street Reform and Consumer Protection Act on May 12, 2010, one week before the Senate passed the Act. Majority Whip Sen. Rick Durbin (D-IL) submitted Senate Amendment 3989, which requires the Federal Reserve to regulate interchange rates. This is, in short, why my bank sent that letter. Sen. Durbin also co-sponsored an amendment from Sen. Brownback (R-KS) that requires corporations to report to the SEC whether they’ve imported certain metals from Congo, and an amendment from Sen. Franken (D-MI) that introduced a number of regulations in the credit rating system. There were no co-sponsors for SA 3989.
Interchange fees are associated with credit, debit, and other transactions. You’ve probably noticed that some small businesses place a minimum dollar amount on debit and credit card purchases to protect themselves from paying transaction fees on low-cost items. A few cents on the dollar may not seem like much for a merchant to lose; when I first moved to New York, I thought neighborhood delis and shops were just trying to force me to use their ATM. When a merchant agrees to accept credit and debit cards, he or she agrees to pay a percentage of each transaction to the card network (VISA, MasterCard, Amex, etc.) which then gets split among the merchant’s bank and the card’s issuing bank.
Merchants and Banks
For most merchants, it’s profitable to offer customers the option to pay however they choose, but merchants could lose money under the current system. In October 2009, 7-Eleven submitted a petition to Congress asking for a reduction to interchange fees. At 1.5-2%, the fees outpace those in Australia and the EU, where laws restrict rates to under 0.5%. The merchants have gotten their wish—under the terms of the Durbin Amendment, the Federal Reserve announced in June that interchange fees must be lowered to $0.21 per transaction plus the amount of the transaction multiplied by 5 basis points (0.05%).
Many banks have responded by ending debit rewards programs, and introducing new fees to customers. Merchants argue that increasing businesses’ profits will bolster the economy, promoting job creation and higher wages for workers. Congress could still revisit parts of the Dodd-Frank Act before or after the Federal Reserve begins enforcing Sen. Durbin’s provisions, and Alan Greenspan predicts that parts of the Durbin Amendment will be reversed in time. This is a complicated issue, but it’s clear that debit rewards programs will need to adapt in order for them to provide value to customers, merchants, and payment providers alike.