Interchange and Routing

What’s the issue?

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.  The Durbin Amendment also mandated banks offer at least two networks for routing of debit card transactions.

How does this affect consumers?

Retailers promised that the Durbin Amendment would cut costs for consumers, and that they would pass the savings they received from reduced interchange costs and lower their prices to the benefit of their customers. Now, ten years after the rule has been in place, there is ample evidence retailers haven’t kept their part of the promise despite benefiting from reduced expenses. The Federal Reserve Bank of Richmond discovered 98% of merchants have either maintained or raised prices since debit interchange controls took effect.  At the same time, the availability of free checking and debit card rewards have dramatically declined as banks were forced to adjust to this lost revenue.

Prior to the Durbin amendment, banks selected the routing network that best served and protected consumers. They opted for debit networks that were not only reliable and secure but offered the best consumer benefits. Unfortunately, because the Durbin Amendment allows merchants to choose the routing network, many merchants opt for the 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.

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?

The Durbin Amendment’s interchange controls have had a significant impact on community banks. Not only has this amendment resulted in significant costs to community banks complying with network routing mandates, but they have also 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.

Current happenings?

Over the past decade, consumers have shifted their preferences and “card-not-present” debit transactions (such as online transactions) have significantly increased. This shift is sparking examination of how card-not-present transactions are routed and whether this ill-conceived rule should also apply to online and credit card transactions.  At the same time, as debit rewards disappeared and deposit account fees increased due to the Durbin Amendment, credit cards have become more popular.

Sen. Durbin has long sought to introduce bipartisan legislation to expand the Durbin Amendment 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.  This prospective legislation would not only diminish consumer benefits like card rewards, but likely reduces the incentives for banks to invest in proprietary innovations since others could free-ride on them.  Ultimately, expanding the Durbin Amendment routing requirements to credit cards would result in a less innovative and resilient payments marketplace for consumers and smaller retailers.

Recently, the Federal Reserve announced plans to make changes to the routing provision of Regulation II, the regulation that came out of the Durbin Amendment, so that it applies to online and other “card-not-present” debit transactions. They propose to require banks and debit card issuers to enable their cards to be processed on at least two networks at every merchant regardless of whether they are used in-store or online.  This proposed rule is technically infeasible and legally flawed, representing an arbitrary undermining of banks’ investments in payments technology. 

What can policymakers do?

This failed policy is yet another example of government interference in a free market economy and  should have never been enacted. The amendment limits the interchange rate and network routing provisions on debit card transactions under the false promises that consumers would benefit through lower prices.

Policymakers should repeal the Durbin Amendment and put an end to this decade-long failed policy only benefitting large retailers and hurting consumers and small community banks.  They should oppose any attempts to impose the failed results of the Durbin Amendment onto credit card customers as well. 

Finally, policymakers should oppose the proposed Federal Reserve rule expanding Durbin routing to card-not-present debit transactions and change the kind of networks that they must carry. To enable a truly competitive marketplace benefiting consumers, the Durbin Amendment should be repealed allowing for more and better options for financial services for all Americans.