How Durbin Affects Credit Unions and Consumers
The last-minute addition to the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act is notoriously referred to in the Financial Payments industry as the Durbin Amendment.
Named after Illinois Senator Richard Durbin, the Durbin Amendment is approaching its eighth anniversary of the date it was implemented back in October 2011 across the card payments space. While explaining the amendment to a new client recently, I asked myself if anyone thinks the Durbin Amendment accomplished what it set out to?
The premise, as you may recall, was to induce economic growth.
If you’re like me you’re probably thinking, “Really? Economic growth?” That’s right. Economic growth. The thought was if the Federal Reserve capped the interchange swipe fees merchants pay for accepting a debit card as payment for goods and services, the savings would be passed on to the consumer and in turn would increase continued spending.
Let’s unpack that. I’m a consumer. You’re a consumer. We’re all consumers. Show of hands, who’s seen a discount or reduction in prices while shopping since 2011? No one? Exactly! I haven’t heard a single consumer brag about all their savings since the implementation of the Durbin Amendment. Don’t get me wrong, there’s been a lot of changes since the amendment first went into effect. It’s just not actual change (i.e. nickels, dimes, quarters). You get it.
The change we’ve seen is the reduction of interchange rates the large retailers pay to the card-issuing credit unions.
Basically, the bigger retailers benefited, and the smaller retailers and card-issuing credit unions have paid the price. Literally. This was accomplished in two ways. First, credit unions are required to have at least two unaffiliated payment card networks for retailers to route transactions to. This allows the merchant to determine the least cost routing for them, which in turn reduces the credit union’s interchange income. Second, a cap was established on interchange paid to financial institutions over $10 billion in assets. Both requirements have been in place since day one, October 1, 2011.
We’ve yet to see any reductions for consumers, but we have seen an increase in merchants charging fees to their customers to accept a card for purchases or requiring minimum purchase amounts.
How interesting… These are the same consumers the Durbin Amendment said it would — What was it again? – Oh, I remember, “Realize reductions in prices at retail locations which would lead to more spending.” Ha. Correct me if I’m wrong, but the increasing number of merchants assessing additional fees sends a different message.
Having said all that, it doesn’t appear there will be any changes made to the Durbin Amendment. Sure, there were whispers last year regarding a repeal of Durbin (or parts of it), but to date nothing has changed. Perhaps by the tenth anniversary, consumers may see some benefits.
Credit Unions, on the other hand, do not have to wait to see if there will be any relief brought on by legislation. Credit Unions traditionally have used multiple payment networks for transactions to route. This was commonplace through the years, but in a post-Durbin world, having multiple payment networks impacts the income credit unions earn through interchange.
Limiting the number of payment networks the credit union participates in will aid in increasing the interchange income the credit union can earn.
I know all of this can be a bit overwhelming and navigating the payments landscape can be challenging, so it’s worth your time to talk to someone who can help.
If you want to chat about Durbin, interchange, or any other fun payments-related topics, reach out to our resident PIN Networks expert, Ava Farrell!