Durbin Amendment
Categories: Regulations, Trading
The Durbin Amendment is part of the Dodd-Frank Wall Street Reform and Consumer Protection Act, a.k.a. the legislation passed in 2010 after the banks screwed everyone over in 2008 by creating the financial crisis.
The Durbin Amendment addresses a specific issue: the issue of interchange fees on debit cards. You know how some shops say “you have to spend at least this much if you want to use a card” or “x% charged on the transaction if you use a card”? That’s because merchants—a.k.a. shop owners—have to pay their bank and your bank “interchange fees” every time you run your card in their store.
Interchange fees are supposed to cover transaction fees, which used to actually cost some money before all of the technology we have today. While the technology came, the interchange fees stayed. Actually, if you ever wondered how your credit card company can afford to give you cash back, airline miles, and other credit card rewards, it's mostly funded with interchange fees. Now you know the secret.
So what happened (in general) was: credit cards were more competitive. People flocked to high reward credit cards like bees to flowers. So credit card companies—to stay competitive—made high reward credit card programs, and raised their interchange fees on debit and credit cards to pay for them. Eventually, merchants cried foul, saying, “enough of this BS...why should we have to pay so much in interchange fees? People want to use their debit cards, and they should be able to do so without me paying such ridiculously high fees!”
And the Durbin Amendment was born, which put a cap on interchange fees (only for debit cards, though), including a percentage and a flat fee. Basically, the government made a law that said “hey big banks, you can only charge x amount now in interchange fees, a.k.a. closer to what it actually costs you to perform these debit transactions...stop being so greedy.”
The Durbin Amendment was a big win for merchants, but some argue that it’s not so great for consumers and smaller merchants. Plus, credit cards are still a free-for-all...at least in the U.S. In Europe, there’s a cap on interchange fees for both credit and debit cards (personal only) as of mid-2015.