Credit card issuers, banks, lawmakers, merchants and consumers could end up facing off this spring if a Senate proposal delays the implementation of new rules capping debit card transaction fees. Under the Durbin amendment to the Dodd-Frank Wall Street Reform and Consumer Protection Act, the Federal Reserve would have limited interchange fees to just a few pennies per purchase.
Lawmakers and consumer advocates cheered the new rules, suggesting that merchants could return as much as 5 percent of their revenues to shoppers in the form of lower prices. The bill's critics speculated that merchants would, instead, keep prices the same while pocketing the extra change.
This month, a bipartisan group of nine senators led by Sen. Jon Tester (D-Mont.) proposed to delay the new rule by two years while commissioning a 12-month study of the law's impact. According to the New York Times, some lawmakers experienced "buyer's remorse" after passing Durbin's amendment last year. They worry that smaller banks may not survive the sudden drop in revenue, despite rules allowing them to carve out their own fee structures with merchant processors. Specific concerns include:
- Banks that once made massive profits from credit card finance charges scrambled to switch customers to less risky debit cards after the personal lending market collapsed in 2008. That move could backfire, especially after many lenders used a "follow me down" strategy to reduce credit limits during a period of market recapitalization.
- Payment platform providers, like MasterCard and Visa, invested heavily to encourage widespread acceptance of both debit and credit cards. They earn a cut of every swiped transaction, but Fed limits could stifle their earnings.
- Politicians still think Wall Street's an easy target, but threats of disappearing perks at banks and credit unions have rattled voters in some parts of the country.
With all three of those groups lobbying for a timeout, you might wonder what you've got to gain from a Durbin delay. There's no telling how merchants will actually respond to lower interchange fees on debit card transactions, especially since no such cap exists for credit card purchases.
Merchants follow the bottom line
Regardless of this debate's outcome, merchants will promote customers toward the least expensive form of payment available. If you've ever swiped a debit card through a payment pad that keeps prompting you for a PIN instead of a signature, you've already experienced this kind of "steering." Costco famously promotes their PIN-transaction preference, while still aligning with American Express small business credit cards.
If you're a savvy consumer, you probably already use a cash back credit card to rack up rewards at the checkout counter. Hold on to that card. They're harder to come by, since banks have dialed back freebies and bonuses in preparation for the new law. A waiting period or an outright reversal of the Durbin amendment would help banks' bottom lines, but wouldn't immediately impact banks' existing policies.