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Unpacking the Debit Card Amendment

As the conference committee reconciles the House and Senate versions of the financial regulatory reform bills, Sen. Richard Durbin’s (D-Ill.) amendment regulating the type and scope of fees that Visa, Mastercard and other companies can charge businesses for debit card transactions has proven one of the hottest flashpoints. But the amendment is confusing, and the topic wonky. To unpack it, I spoke with Mike Konczal, a fellow at the Roosevelt Institute and financial blogger.

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.

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