Thursday, September 22, 2011

Credit Card Processing And Durbin's Amendment

In just over a week the Durbin Amendment goes into affect targeting credit card processing fees.  It has been a long time coming but will it provide the relief that it is intended too?  The common belief is yes but if we dig a little deeper, questions will arise.

The whole thing started as a result of the credit crunch which rocked the economy in 2008.  Last year the Dodd-Frank Act was passed which attempted to reel in financial regulations which Wall Street sorely lacked.  This new Amendment focuses on Credit Card processing fees which of late, have become overly burdensome for small business owners.  The fees they must pay to their merchant account providers is dipping into their profits and must ultimately passed on to consumers.

To make a confusing piece of legislation as simple as possible, let us define a generalization for the entire Dodd-Frank Act as it applies to humans.  It was simply a reaction to the credit crunch of 2008 and contains what is considered to be the most drastic attempt at policing financial regulation ever.  Whether it works or not or is simply nothing more than political posturing is yet to be determined but we will only concern ourselves here with the Durbin Amendment to Dodd-Frank.

This Amendment is focused on credit card processing, mainly debit cards and how big banks have been muscling merchants and forcing them to accept less than competitive merchant services because of their sheer size and power.  Currently, big banks are able to impose penalties on merchants for giving customers incentives to pay by cash or using other payment networks to pay for items.

As consumers we often believe the price of something is what we pay for it but it is a little more complicated than that.  Merchants must pay transaction fees to accept credit cards and these fees dip into their profits when accepting a credit card as opposed to cash.  This is why there are always little signs on the register telling us that we must spend a minimum for a merchant to accept credit cards, or sometimes they tell us that it will be a dollar or so surcharge before they swipe our card.  This money does not go to the merchant, but the merchant services provider.

In a lot of cases a merchant has to declare a minimum or even maximum sale to avoid the pitfalls of they may face from their merchant services provider and the Amendment aims to stop this.  Merchants are even penalized for loyalty programs, accepting checks and processing gift cards so this legislation was needed to provide relief for merchants drowning in fees.

The Durbin Amendment clearly states the maximum a merchant services provider can earn on a transaction and for those keeping score it goes like this.  For a debit card transaction highest interchange fee an issuer can charge 21 cents plus a max of 5 basis points multiplied by the amount of the transaction.  This Amendment also focuses on interchange, which simply put, is the fee a merchant's bank has to pay to its customer's bank to pull the money due from the customer's account. 

The intent of the Durbin Amendment is to bring direct relief to merchants but many critics say the banks will resort of other tactics to make up the lost revenues.  We have already seen the disappearance of debit rewards programs for consumers and the days of free checking accounts are all but gone.  An assortment of new fees we have never even heard of will undoubtedly pop up on or about October 1st so while there are major changes around the bend for credit card processing, ultimately we will have to watch the spending behavior of consumers to gauge its success.

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