The Sunny Side of the Durbin Amendment
The Durbin Amendment is well-known throughout the financial services community thanks to extensive media analysis over the past year. Originally scheduled to take effect last month, the Durbin Amendment, an addition to the Dodd-Frank Wall Street Reform and Consumer Protection Act, will now take effect in October. Initiated as a result of merchant concerns about their costs for accepting debit card transactions, the Durbin Amendment limits the amount a card issuer can collect for debit card interchange fees -- also called "swipe fees."
Today, card issuers receive fees that can be up to 1.9 percent of each transaction amount when a consumer uses a debit card to purchase goods or services from a merchant. Under the Durbin Amendment, these fees will be limited to no more than US$0.21 per transaction (plus fraud cost adjustments) when cards are issued by financial institutions that have assets of more than $10 billion. The suspected hit to the revenue of these financial institutions is anticipated to be in the billions of dollars per year.
To date, most of the public discussion around the Durbin Amendment has focused on the potential negative impact to financial institutions. Largely ignored is the fact that there are benefits -- yes, benefits -- that will be experienced as a result of these new regulations.
Smaller financial institutions, merchants and consumers all have the potential to experience significant benefits in the coming months as institutions begin to comply with the rules set forth in the Durbin Amendment. Since the interchange regulation is limited to financial institutions with assets in excess of $10 billion, smaller institutions will continue to receive existing swipe fees based on their current practices -- meaning they are less likely to alter how they do business with their customers to make up for lost profits.
The flexibility in swipe fees for smaller institutions means they have the opportunity to earn more revenue on each transaction, allowing them to compete more effectively with larger institutions. In addition, as customer benefits such as free checking and rewards programs begin to disappear at larger institutions, consumers may be drawn to smaller institutions that are still able to offer these incentives.
By offering a variety of different products that are not available at larger institutions, small community banks and credit unions can truly set themselves apart as a better, more viable alternative for the average consumer.
What About Consumers?
Certainly, the big winners in the post-Durbin landscape are the merchants. Now, as swipe fees are capped, merchants' overall processing costs per transaction will decrease -- meaning an increase in profit. Why should we be pleased that the merchants will have more revenue? Because, ultimately, the merchants benefiting from the Durbin regulations may, in fact, transfer some of these benefits directly to consumers as cost savings through special offers, coupons, discounts, etc.
Retailers can even provide their own loyalty programs to attract and retain customers. For example, Target offers 5 percent off every item purchased each time a customer uses a Target-issued decoupled debit card. Target can do this because it avoids paying other card issuer fees. Other retailers, such as Kohl's or JC Penney, have similar programs providing special promotional offers allowing customers to earn discounts on purchases when using their store-issued credit cards.
Retailers can also create programs that provide discounts when customers pay for their purchases in cash. Through the decreased swipe charges, retailers will have the ability to create and offer more programs of a similar nature.
This change will also inspire new relationships in both large and small issuers with merchants in the emerging merchant-funded network field. Large issuers still wanting to provide value through debit card use may offer merchant-funded rewards as an alternative to issuer-funded programs, with merchants funding the consumer value, and the large issuer providing a robust population for marketing offers.
Smaller issuers have the option to participate in these networks as well and can keep parity with the large issuers and -- combined with an issuer-funded program -- create a competitive advantage. Merchants can use this new relationship opportunity as a marketing channel that has cost tied to performance on marketing.
With the challenging economy, consumers continually seek ways to save money and get more value for their dollar. The post-Durbin financial landscape will provide an opportunity for smaller financial institutions and merchants to market themselves to an entire audience hungry for ways to save.
As merchants and financial institutions roll out programs to attract customers, ultimately it is consumers who will benefit from the increased competition for their business. Whether it is through lower prices, loyalty programs or other incentives, the Durbin Amendment changes can be a win-win-win for smaller financial institutions, merchants and consumers who capitalize on the situation.