An Inside Look To The Durbin Amendment​​

AN INSIDE LOOK TO THE DURBIN AMENDMENT​​ 3







An Inside Look to the Durbin Amendment and
Its Effect on Merchants













Abstract
This paper aims to summarize the intentions of section 1075, the Durbin Amendment (Amendment), of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Act). TheAmendment seeks, among other things, cost reduction to merchants when processing bankcard payments by capping the cost of debit cards transactions. This Amendment also has a particular structuring allowing Merchant Services Processors Acquirers to assess fees with onerous intentions. Confusing since inception and rigorous in its application by the Federal Reserve Board (FRB), this Amendment hasthe very best of meanings to help small business owners. Arguably, it does not quite meet said purposes.
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An Inside Look to the Durbin Amendment and Its Effect on Merchants
​U.S. Senator for Illinois Richard Durbin offered an amendment to the Senate version of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The amendment passed by a margin of64 votes, 17 Republicans, 47 Democrats or approximately 2/3rd of the U.S. Senate. President Obama signed the Act into law in July 21, 2010.
​These are the several different components of the Durbin Amendment (Dodd-Frank Wall Street Reform and Consumer Protection Act, 2010)
1) Debit interchange rates, effective July 21, 2011:
b) Pin-based and signature-based fees, interchange parametersestablishing floor and ceiling costs, save for these three exceptions:
i) Government issued benefit cards,
ii) General-use reloadable prepaid cards,
iii) Financial institutions with less than ten billion dollars in assets.
2) Fraud mitigation, effective July 21, 2011:
a) Allowing but not requiring the FRB to make cost adjustment for interchange.
b) Issuers may include allowances within the feestructure for fraud prevention purposes.
3) Circumvention or evasion of fee control, effective July 21, 2011:
a) Issuers, directly or indirectly, cannot use the new fees to compensate, circumvent, or evade fee control.
4) Exclusive networks, effective by April 1, 2012 and April 2013:
a) Prohibiting issuers from restricting merchants to process debit transactions through exclusive or proprietorialnetworks.

5) Merchant Routing, effective October 1, 2011:
a) Merchants are able to select least expensive network routing for a debit card transaction.
6) Discounts and incentives, effective July 22, 2010:
a) Merchant have the capacity to offer discounts to clients to incent alternative payment methods (e.g. cash, check).
7) Maximums and minimums, effective July 22, 2010:
a) Governmentagencies and higher education institutions may set a maximum dollar amount for bankcard payments.
b) Merchants gained the capacity to set a minimum amount of ten dollars for bankcard payment.
The fundamental motivation to set forth these provisions by Senator Durbin reflects the quintessential complaint many merchants have had against the association such as Visa, the issuing banks, and merchantprocessors for a very long time. The Senator wrote in a letter responding to a Wall Street Journal op-ed criticizing the passing of this reform,
[The] people who are following this debate understand what we are talking about; each time you use a credit card or a debit card to pay for something—a meal at a restaurant, groceries, pharmaceuticals, a donation to a charity, buying gas for yourcar—each time you do there is a fee that is charged to the merchant. That fee is charged by both the bank issuing the card and the underlying credit card company. It is called an interchange fee. (Durbin, 2011, para. 3)
​He goes on relating the sentiment of a close friend of his, Rich Niemann, a small business owner in Quincy, IL, Niemann expressed to the Senator,
[These] credit card companies and...