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First it was the Credit CARD Act, designed to protect consumers against unfair credit card policies. Credit card companies found ways around the Act to collect their fees anyway, leaving credit card customers with consuming fine print to read in order to avoid new fees and charges. One of the ways banks found to make up for lost profits from the Act was by instituting policies to make money from debit cards. (And business credit cards, but that’s fodder for another post…)
Now, the Durbin Interchange Amendment for Debit Cards serves to limit the amount of transaction (interchange) fees that credit card companies can charge for debit transactions. Odds are banks will, once again, seek to make up the profits. Where? With customers, of course.
To fully understand the Durbin Interchange Amendment, it’s good to know a little bit about merchant accounts and interchange fees.
How Interchange Fees Cost Merchants
Every time you make a purchase using your credit or debit card, the merchant’s account provider charges the merchant a fees. These transaction processing or interchange fees are typically between 1 and 5 % of the transaction, plus another 25 to 50 cents per “swipe” of a credit card.
This is why I advocate using cash for small purchases at local businesses whenever possible.
These fees don’t necessarily harm the big box retailers, because they can negotiate better terms. But when you swipe your card to buy a 99 cent pack of gum at the local deli, and the merchant is paying 5% of your purchase plus 50 cents for your swipe to his merchant account provider, it makes a dent in a mom-and-pop’s profits.
A mom-and-pop isn’t going to go out of business because too many people bought too many cups of coffee with debit cards, but it’s just a waste of money that the banks don’t need to get, in my opinion.
But back to the Durbin Interchange Amendment. There had been no cap on the rates merchant account processors could charge in interchange fees. Legislators — specifically Senator Durbin (D-IL) — also feel that processing fees are getting too high. To stimulate market competition between merchant account providers, as of July 2011 the Federal Reserve will institute caps on interchange fees.
In theory, retailers will pass the savings on to customers.
The amendment is part of the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act and also includes a few other provisions.
- Merchants will be able to run debit card transactions on any card network
- Merchants can now legally offer discounts for cash or PIN transactions
- Retailers can now legally set a $10 minimum on credit card purchases, which many retailers already do but are not permitted by law
How Will This Affect Your Debit Card Rewards?
Some finance experts speculate that banks will look to make up for the profits lost by the cap on interchange fees in many of the same ways they are making up for profits lost due to the Credit CARD Act. Here are just a few ways our debit cards may change in the future:
- Higher ATM transaction fees
- Transaction fees on ATM transactions that are currently free, such as checking a balance
- Fewer rewards for debit card holders (or the end to debit rewards programs altogether
- Annual fees for debit cards
- Inactivity fees for debit cards
Banks may also try to make up for lost profits in other ways, including:
- The end to free checking accounts
- Banking transaction fees
What Can You Do To Protect Yourself?
You can protect yourself from side effects of the Durbin Interchange Amendment in the same way you protect yourself from the regulations of the Credit CARD Act:
- Read your statements carefully so you know what you’re paying — and why
- Read all enclosures that come in the mail or by email from your bank
- Shop around for the best deals on credit and debit cards and checking accounts. Many experts say that, for now, local banks and credit unions may offer the best deals for customers.
- Unless you’re applying for a mortgage or another big loan, don’t be afraid to switch banks if you find another offer.
- Check in at CreditShout.com daily to read about the latest finance legislation and how you can stay one step ahead of the banks.