Interchange and Routing

What’s the core issue? Durbin Amendment 101

Every time you use your debit card, the Durbin Amendment comes into play.

In 2010, Congress passed the Durbin Amendment as part of the Dodd–Frank Wall Street Reform and Consumer Protection Act. It contains provisions intended to limit the amount of interchange revenue banks can receive on debit card transactions. These interchange fees are most banks’ largest source of non-interest, non-fee income and is the revenue stream offsetting the cost of offering a checking account.

Rather than save consumers money as promised, merchants pocketed the savings they reaped from the government price cap, while community banks lost a revenue source to support important consumer benefits like free checking and debit rewards.

The Durbin amendment also contained a routing provision mandating that merchants be allowed to choose the networks for routing debit card transactions.

Now, Senators Dick Durbin (D-IL) and Roger Marshall (R-KS) have introduced S. 4674, new legislation which expands government routing mandates to the credit card market, with potentially disastrous consequences.

How does the Durbin Amendment affect consumers?

After 2010, the availability of free checking and debit card rewards dramatically declined as banks were forced to adjust to lost interchange revenue. And on the routing, many merchants opted for a lowest-cost network, which may not be the most secure. Some low-cost networks do not support basic fraud detection features like text messaging to notify consumers of debit transactions, nor do they always provide bankers the same ability to reverse fraudulent transactions.

Marshall and Durbin’s new legislation would impose even more restrictive government mandates on credit card transactions.  Rather than allowing banks to choose networks offering the best customer experience, security, and resiliency, they would be forced to choose among options set by the Federal Reserve.

Ten years after the Durbin Amendment was enacted, consumers have yet to benefit from the lower prices retailers promised; they are harmed by reduced access to affordable deposit accounts and losing out on security benefits protecting them from fraud.

How does this affect community banks?

Community banks have lost substantial revenue due to the cap on interchange fees. This limits investments small community banks can make in staying competitive in a fast-moving payments landscape and their ability to provide the best financial products to meet customers’ needs.

With additional government mandates a possibility if Senators Durbin and Marshall’s legislation is passed, these same banks, which tend to have a lower volume of credit card transactions, may be forced to no longer offer credit cards, as their options and negotiating power would be drastically reduced.

The newest challenge: credit card mandates

Despite the Durbin Amendment’s severe consequences, Sen. Durbin has long sought to expand routing requirements to include credit card transactions for all banks, including community banks issuing credit cards through a third-party agent or revenue-sharing program. 

Durbin and Marshall’s newly introduced legislation does just that, mandating government interference in credit card transactions and in turn:

  • Force banks to transmit credit card transactions using companies set by the government, rather than using companies that your bank picks based on factors like reliability and safety
  • Likely mean elimination of important benefits like free checking and credit card rewards programs at many community banks.
  • Require banks accept all types of transactions a merchant requests, which would force banks to frequently reissue cards to meet new retailer demands.

What can policymakers do? Oppose the Durbin-Marshall Credit Card Competition Act

Policymakers should oppose any attempts to impose the failed results of the Durbin Amendment onto credit card customers. Lawmakers and consumers alike can protect consumers and small community banks by voicing their urgent opposition to these government mandates and the current legislation, S. 4674, the Credit Card Competition Act.

Finally, policymakers should also support repeal of the Durbin Amendment, a decade-long failed policy which has only benefited large retailers.