In basic terms, what does the Durbin interchange amendment do?

It does a few things. First, it gives the Federal Reserve regulatory authority over debit interchange fees. They are tasked with making sure that the fees be reasonable and proportional to the costs of the issuer or the payment network. It also gives them a lot of information about this market — and it is hard to know much about it now. In 2009, a Government Accountability Office report had to throw up its hands in the air about this issue. The report pointed out how tough it was to get information about these fees from the companies themselves — they had to go through old merchant contracts, which were not the most direct or easy way to figure them out. Even though plastic is becoming the new standard, it remains beyond the regulatory sphere.

Second, it allows merchant to give you discounts for using debit cards. Right now, it is legal for a business to charge you less for using cash, rather than a credit or a debit card. What they can’t do by contract — and the law is not totally clear on this, but this is in the contracts that merchants sign with banks — is offer you a discount for using a debit card rather than a credit card. From your point of view, your debit card and credit card are basically the same thing. You’re somewhat indifferent to using one or the other. By offering you rewards, your credit card encourages you to use your credit card, rather than your debit card. So, you’re nudged to use your credit card.

But, for the merchant, it is cheaper for you to use your debit card, rather than your credit card — the fees that Visa and Mastercard charge are a lot lower. Plus, the pin on the debit and the security offered are better for the merchant. So, because businesses have to offer the same price whether you are paying by debit or credit or one of the fancy rewards credit cards, even though those have different interchange fees, businesses are basically subsidizing the fancy credit card customers’ airline travel tickets. Plus, those rewards cards are more likely to be fraudulent. This ends that.

Finally, this bill also effects the minimums and maximums that businesses have — where they say, you can only pay via credit card if it costs more than $5. That is technically against businesses’ contracts with the banks. This allows them to do it.

So how does this change if you’re a business owner? What happens when a customer comes up to the counter and buys something for, say, $100?

Let’s say that you could pay via a debit card, a credit card and a rewards credit card. With the last one, the rewards card, the merchant is basically subsidizing you getting airline tickets, because the good is the same but the interchange fee is more, upwards of 2.5 or 2.8 percent. With a credit card, it is 2.19 percent on average. And with a debit card, it is 1.75 percent if you sign, and 0.60 percent if you enter your pin instead. The bill doesn’t get at the difference between the rewards card and the regular credit card, but it gets at the difference between the debit card and the credit card.   As a merchant you can now put incentives out there for consumers to use the lower cost option, where as right now the system encourages extra credit consumption.

Durbin also says that this will help small businesses. How does that happen?

Well, for instance, it’s likely that Walmart gets a better interchange rate than a small business. Though this information is guarded, people often assume that this is happening. Walmart has the market power to negotiate its interchange rate. What does that mean? Groceries are a very competitive margin business — the margins are really low, and customers are price sensitive. If Walmart gets one percent off of its interchange rate from Visa or Mastercard, they can undercut on price by that much. One percent, on the other side, can shut down a small grocer. This gives small businesses a way to be competitive with that — by saying, we’ll give you $50 cents or one percent off to pay with debit.

But couldn’t Walmart still just offer a percent off for using debit?

When you get to debit, especially pin debit, there’s much thinner margins, and less negotiation, for both businesses so the small business can compete more easily with Walmart under Durbin. This is how Costco, as a company, is competitive. It doesn’t accept cards at all.

And so are there assurances that some of these savings will get passed on to consumers?

The international experience is uncertain. But we do know that the system is set up to maximize the volume and amount of credit card usage. With merchants having more negotiating power, they will likely be able to offer discounts for certain business lines.   Evidence suggests that consumers will choose to take discounts for using debit over their rewards programs, so what we’ll likely find is a lot of innovation at the business level for how to get consumers to use the best option in their wallet.

That’s not the only credit card development. The New York Times reports that issuers deluged by delinquencies are starting to cave, agreeing to cut balances in half, or more, for people who can’t pay their bills. Even the front-line customer services representatives — the ones who usually tell you they don’t have authority to do anything – now are getting the OK to make deals. Credit experts told The Times  “a line has been crossed.” Usually, card issuers might reduce interest rates, but not the actual balance. Anyone who has ever dealt with a credit card company knows the answer to any negotiation used to always be “no.” But with unemployment climbing, issuers apparently are willing to take whatever they can get, even if it means reducing a borrower’s balance.

Calculated Risk comments that in a financially literate world, people would pay their balances in full each month. There are lots of reasons why that doesn’t happen, from legitimate financial hardship  to poor choices. That’s why I’m not sure the move by issuers to wipe away debt is necessarily good news for consumers.

It’s true that borrowers shouldn’t be stuck paying off balances bloated by unnecessary and unfair fees. The card companies should rightly take a hit for some of those practices. Lesson learned.

But what’s the lesson here for some borrowers? Not everyone is a victim of financial hardship. No doubt you know more than a few friends who ran up big balances, buying things they really didn’t need or couldn’t afford in the first place. Now that times are tough, it’s possible some might get their debt sharply reduced. And what will they take away from the experience? That you can run up big debts and still find a way to get out of them?

Credit card issuers are often an easy target, thanks to some of their more egregious lending decisions. But borrowers aren’t always victims, either. The ones facing hard times and really need it may get a break. So will those who still cling to the easy money mentality that helped get the economy into this mess in the first place.

The proposal would prohibit rate hikes on existing balances, give cardholders longer notice to pay their bills, and prevent card companies from charging fees when customers pay their bills on time.

The House had passed a similar (though less stringent) bill last month by a vote of 357 to 70. Leaders from the two chambers now must meet to iron out the differences between the two proposals.

Just one question: If 90 senators voted in favor of the bill, why did Republicans threaten a filibuster to begin with, thereby forcing Democrats to take the extra, time-consuming step of filing for cloture? Seems that 60 really is the new 50 in the upper chamber.

The question now is this: Will a controversial gun proposal attached to popular underlying legislation be the poison pill that sinks that larger bill? That’s been the case with legislation allowing the District of Columbia a voting representative in Congress, to which the Senate attached language scrapping many of Washington’s strict gun control laws. As a result of that gun amendment, the DC-vote bill remains stalled in the House months after it passed the upper chamber.

Now, Sen. Chris Dodd (D-Conn.), the chief sponsor of the credit card reform bill, is wondering whether the same might be the fate of his credit card proposal. “My concern is about what the underlying bill — what happens to it,” Dodd said on the chamber floor just before the vote. “I hate to see us lose this opportunity to make a difference with credit card reform.”

Sen. Tom Coburn (R-Okla.), who sponsored the concealed weapons bill, said he supports many of Dodd’s credit card provisions, and didn’t have in mind to offer his amendment just for the purpose of killing the larger bill. “I don’t want to see it fail on this,” Coburn said. “But nor do I want to see the Second Amendment trampled on.”

So much for an easy, clean, must-pass credit card reform bill.