Salient features of the Amendment
a) Regulate Interchange Fees
- The Amendment provides that the amount of any interchange transaction fee that an issuer or payment card network may charge shall be reasonable and proportional to the actual cost incurred by the issuer or payment card network with respect to the transaction.
- The statute provides that, in issuing rules, the Federal Reserve Board is to distinguish between actual incremental cost incurred in the authorization, clearance, and settlement of a particular debit transaction and other costs not specific to a particular transaction.
- General costs would have to be excluded from computation of the fees that issuers and networks would be permitted to include in calculating their interchange fees.
b) Remove Limitation and Restriction on Merchant Providing Discount
- Under the Durbin Amendment, networks are prohibited directly or through processors from inhibiting the ability of any person from doing any of three things:
- Providing a discount or in-kind incentive for payment through the card or device of another network
- Providing a discount or incentive for payment by the use of cash, check, etc
- Setting a minimum or maximum dollar value for the person's acceptance of cards
c) Network Non-Exclusivity
- The Fed is considering one of two potential rules and is actively soliciting comment between two alternatives:
- All debit cards must participate in at least two unaffiliated debit card networks. In all likelihood, this will mean one network for signature debit and a different unaffiliated network for PIN debit
- All debit cards must be in at least two different networks for each authentication method (i.e., Two networks for signature debit, and two networks for PIN debit)
Key Stakeholder and Impact on them
a) Issuers
Additional costs not specific to a particular transaction like administrative overhead costs, research and development costs, and system creation and maintenance costs cannot be added to interchange transaction fee. This may lead to a loss in revenue for the issuers.
b) Networks & Processor
VISA and MasterCard will lose some of their volume (revenues), particularly their fixed-fees for small payments. Merchants' selecting which network to route debit transactions would also put strong downward pressure on network acquirer fees and interchange.
c) Consumer
Cardholders have to make unnecessary purchases in order to meet minimums that merchants set for card acceptance. That could disproportionately harm low-income consumers.
d) Merchants
Merchants will get benefited as they will be required to pay a lower Interchange fee while accepting debit transaction. Also, they will be able to set a minimum/ maximum dollar value limit for accepting the debit cards. They will also have greater control over routing a debit card transaction.
Predictive Measures by Stakeholders to Minimize the impact
Issuers may tend to increase prices to cardholders to cover their necessary costs that are no longer covered. Also, the banks will recover the lost amount of interchange revenues by charging debit cardholder an annual fee. Issuers might also decrease the rewards or eventually phase out the debit Rewards program. This, in turn, will result in a widening of the rewards disparity between credit cards and debit cards.
Incentivizing payment in cash by merchant could force consumers to use their debit cards to get cash at ATM machines operated by banks that did not issue the consumer's card. Thus, increase in cash withdrawals and cash payments may trigger a higher ATM fee.
The merchants will be tempted to go tor a different-tiered pricing structure. Though, the costs for implementing this would not be zero. Some of the costs involved would be for rolling out a new or modified POS system across the business footprint, labor costs for entering and maintaining pricing lists in the POS system, labeling/re-labeling etc.
The impact of Durbin Amendment will unfold in waves over time as initial new rules are put in place and the players impacted by them gradually adjust and optimize their strategies to the new environment. The proposals in Durbin Amendment are instituted as means of creating merchant savings and are theoretically supposed to translate into lower prices for consumers, thereby benefiting them as well. While merchants, and possibly consumers, stand to save in the short-term, their savings will only be short-lived. Numerous market forces are expected to eventually mitigate these benefits and make a restructuring of the debit card market as well as an increasing reliance on prepaid cards the Durbin Amendment's lasting consequences.
