The Durbin Amendment and You

February 22, 2019
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In one of President Trump’s Executive Orders, he ordered a review of the Dodd-Frank Act. This brought it back into the spotlight and put it at the forefront of many people’s minds. The Dodd-Frank Act was legislation passed by Congress in the wake of 2008 Financial Crisis. It imposed sweeping regulations throughout the financial sector, most specifically targeting banks, investing companies, lenders and insurance companies. While there are many indirect effects of the Act on merchants and small businesses, the most apparent and direct effect was caused by the Durbin Amendment.
The Durbin Amendment specifically targets Transaction Fees and Interchange Rates that financial institutions are able to charge to businesses. The quickest summary is that it capped Interchange for most debit related transactions to $0.21 per transaction plus 0.05% on volume.
In this post, we want to speak of 3 ways the Durbin Amendment has affected businesses.
1. Lowered fees for most businesses
The Durbin Amendment was designed to help bring down debit fees for businesses. At the time of the legislation, the average debit transaction was roughly $40, and the average cost per transaction was roughly $0.44. After the legislation, these fees were reduced to about $0.24 per transaction on the same $40. This created a significant savings for many businesses, especially those with larger transaction amounts. If we assume the business does 1,000 of these transactions a month, that’s a savings of roughly $200 per month.
2. Increased fees for businesses with low transaction amounts
While many businesses benefitted from the changes in debit fees. There were some businesses who actually saw their fees increase, a lot. Prior to regulating debit interchange, banks would average the cost across different sectors, charging higher fees for some industries, and lower for others. For businesses with small tickets (transaction amounts under $15) they would pay as low as $0.04 per transaction and 1.55% on volume. For a $5 transaction that would mean a fee of $0.11. When the legislation took effect, the issuers starting charging all regulated transactions the legal maximum of $0.21 plus 0.05%. Now the fees on the same $5 transaction are $0.22. If we assume a business does 1,000 transactions, that’s an overall increase in fees of $95 per month.
3. No more freebies
Prior to the Durbin Amendment, many financial institutions would offer free banking services and they offset the cost through income off of payments made with debit cards. This income was generated by charging businesses steep fees for accepting debit transactions. The Durbin Amendment cut this income in half for many financial institutions. This resulted in huge amounts of lost revenue for banks who then had to make up that income in other ways, meaning a lot of free services were no longer free or had more restrictions. Account fees and penalties also went up significantly, especially for businesses.
With the review that was ordered, it remains to be seen what changes are likely to come. At this point only time will tell.

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