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Durbin takes effect Oct. 1. Should you care?

By , CardRatings contributor
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Come the first of October, you'll probably think a lot of things, like, "Great, my mortgage/rent is due," or, "Geez, it's October already?" It might hit you that it's almost Halloween, or maybe if you live in a part of the country where the tree foliage gets spectacular during the fall, you might be thinking about taking a road trip. But I highly doubt many of you will be thinking, "Hey, the Durbin Amendment becomes law today."

But bank executives, credit card issuers and personal finance experts around the country are thinking just that, and so in case anyone is wondering what all the fuss is about, here's everything you need to know about Oct. 1.

What is the Durbin Amendment?

It's a proposal from Illinois Senator Dick Durbin that was part of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. The provisions of the Durbin Amendment become law on Oct. 1, 2011. The new law will reduce, by nearly 50 percent, the average amount that retailers pay for debit card transactions (often called interchange fees or swipe fees).

Retail businesses have been paying banks an average of 44 cents every time a debit card transaction goes through. Effective Oct. 1, the Federal Reserve will limit the transaction fee to no more than 21 cents, plus 0.05 percent of the transaction (2 cents average), plus 1 cent for issuers that have fraud-prevention standards in place. This hasn't affected credit cards; banks have been getting, and will continue to get, almost 2 percent of each transaction price.

Why anyone besides Senator Durbin should care

Well, since the new law cuts debit card fees in half, banks are going to be earning considerably less from debit card transactions. To make up the shortfall, they appear to be following two main strategies:

  1. Lob fees onto the consumer to make up for the shrinking of debit card revenue
  2. Offer more rewards and perks on credit cards to make them more attractive and to increase credit card revenue

Banks are now likely to find credit cards much more profitable under the new law, due to that aforementioned 2 percent of the purchase price per transaction. For purchases over $10.50, on average, the credit card issuer will make more in fees if you use a credit card instead of a debit card.

What it means to you

If the perks tempt you to use credit cards more, it can be a better, worse or neutral move for your finances. If the credit card gets you into more revolving debt, you could end up for the worse. If you cash in your rewards and pay your bill on time, you're probably better off. It's more or less neutral for you if you use your credit card more and pay on time but have no rewards attached with your credit card.

In any case, we feel that anyone who uses debit and/or credit card should care--c'mon, at least a little?--about the Durbin bill.

What's happened so far

Some banks have been getting rid of free checking. Bank of America, Chase, Wells Fargo and other major banks have been charging a monthly fee for checking accounts that dip under $1,500 (although that fee can generally be avoided if you set up direct deposit), and many banks have been diminishing or dropping the rewards that come with some debit cards.

On the other hand, other banks, like Huntington National Bank (a regional Midwest bank) have made a very big deal in commercials that they have free checking and no weird debit card rules that trick you into fees--so they're treating all of this as a chance to market themselves. It has been an interesting time for those in the personal finance space who follow banks.

Why the Durbin Amendment is a good thing

Whether the new law is a good thing depends on where you stand, and your point of view of the financial world. A few weeks ago, Sen. Durbin spoke to a group of reporters in Nashville and explained his reasoning: "The retailer will be more profitable. That's what's behind this." Durbin said that the amendment was designed to protect retailers such as gas stations, for instance, who often lose a lot of their profit to debit cards.

Durbin added that retailers were likely to pass on their profits to their customers, at least those retailers who are competitively trying to entice you into their stores.

So the law, whether it works out this way or not, was designed to protect not only consumers, since arguably lower interchange fees should result in lower prices for products and services, but also business owners, especially mom-and-pop operations who depend on numerous small transactions to survive.

What could go squirrelly

The consensus among bankers, however, has been that retailers aren't likely to pass on the savings to consumers because, well, business folk are only human, and they'll want to keep the profit. That would mean that consumers will get nothing out of the Durbin Amendment.

Meanwhile, according to Bloomberg, a Janney Montgomery Scott analyst predicted that Visa and MasterCard will increase fees on what the retailers pay the credit card issuers for "small-ticket purchases." For example, on a $2 purchase, the fee would increase from 8 cents to 23 cents--over 10 percent of the purchase. (If you're suddenly confused, recall that merchants not only pay a fee to your bank every time you swipe your debit card, but also to the payment network used to transfer the payment, generally either Visa or MasterCard.)

If that happens, merchants may react by refusing to accept Visa-branded debit cards for smaller purchases. You might then decide to use your credit card for those minor purchases, like a bag of chips or a daily DVD rental…potentially adding to your revolving debt burden.

Save the date

The significance of Oct. 1 is not limited to the world of plastic cards. Thomas Edison opened the first electric lamp factory on this date in 1880. Yellowstone and Yosemite National Park, in 1890, were established by the U.S. Congress. And on October 1, 1992, the Cartoon Network launched. In any case, you and your local store owners may not look at your debit card, or your credit card, in quite the same way again.

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