The Dodd-Frank law, enacted in 2010 in response to the recession of the late 2000s, included several critical provisions to ensure that the financial shenanigans that wreaked havoc on our economy don’t recur. One of the provisions that has the most direct pocketbook effect is the Durbin amendment, named after Senate Majority Whip Dick Durbin (D-Ill.), which limits and regulates the amount banks can charge for handling debit card transactions.
These “swipe fees” are one of the most lucrative aspects of the banking industry, whereby banks claim a slice of everyday transactions by essentially charging consumers for handling their own money.
Unlike credit cards, which use interchange fees to account for the risks associated with lending, debit cards draw directly from checking accounts and don’t pose such risks. The exorbitant amounts of money banks were making using debit cards served little purpose other than to pad the profits of the major card companies, most notably Visa and MasterCard. These companies wield tremendous power and were able to hide the debit card fees while they skyrocketed from $6 billion to $18 billion, an amount that greatly exceeded costs and was far and away higher than the fee level in any other industrialized country in the world.
Fortunately, during the consideration of Dodd-Frank, a bipartisan group led by Durbin decided to halt these practices in their tracks and wrote an amendment requiring the Federal Reserve to regulate the level of fees that could be charged. One year ago, the Fed issued its regulations, requiring that swipe fees on debit cards be reduced from 42 cents to 21 cents. The Durbin amendment also permits merchants to offer incentives to consumers to use lower-priced debit cards to drive spending traffic away from the use of credit cards.
Banks predicted armageddon, prophesying that the Durbin amendment would be the end of free checking and that consumer prices would rise. Yet none of their portended plights have occurred. Consumers were prepared to take their pocketbooks and walk away from institutions that attempted to charge fees for checking. When several banks endeavored to charge their patrons for their debit cards, they were met with angry outcries and significant consumer contempt. Consumers stood their ground, and the banks were forced to back off.
A year out from the Fed’s issuance of regulations, we can see a range of positive effects for consumers around the nation.
Countless small banks and credit unions have been seeing increased debit card usage and income, and many have reported rising usage of free checking accounts. Many retailers, particularly gas stations, are offering lower prices for customers who use debit cards, while the Swedish furniture retailer Ikea offers savings vouchers for patrons paying with debit. Home Depot announced that it lowered prices on more than 3,000 items by reinvesting the savings that it accumulated thanks to the lower swipe fees.
Competition has been flourishing, to the benefit of the consumer, and Moody’s Financial Services predicts that retailers will continue to use the savings from swipe fees to help shield customers from other price increases.
With competition on the rise and consumers from coast to coast reaping the benefits, the Durbin amendment is a working example of why we need regulation when markets don’t work effectively. Let’s all wish the amendment a happy first anniversary as we pull out our debit cards and enjoy the savings the bill is affording us.
David Balto is a former policy director at the Federal Trade Commission.