Durbin Amendment to the Dodd Frank Act: Two Caps are Better than One for Debit Card Interchange Fees

Florida State University Law Review, Dec 2014

By Maureen Kane, Published on 07/01/14

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Durbin Amendment to the Dodd Frank Act: Two Caps are Better than One for Debit Card Interchange Fees

Durbin Amendment to the Dodd Frank Act: Two Caps are Better than One for Debit Card Interchange Fees Maureen Kane 0 0 Thi s Note is brought to you for free and open access by Scholarship Repository. It has been accepted for inclusion in Florida State University Law Review by an authorized editor of Scholarship Repository. For more information , please contact , USA Follow this and additional works at: https://ir.law.fsu.edu/lr Part of the Banking and Finance Law Commons, and the Consumer Protection Law Commons I. INTRODUCTION Ignorance is not always bliss. Every day in the United States, there are over one hundred million debit card transactions completed to purchase goods or services;1 however, most consumers do not know or even care how they work–they just care that they work. This ignorance allows the card-issuing banks to charge “hidden” fees, known as interchange fees. Every time a debit card is swiped, J.D. 2014, magna cum laude, Business Law Certificate with High Honors, Florida State University College of Law; B.A., Biology and minor in Business Administration, 2011, cum laude, University of Florida. I would like to thank Professor Manual A. Utset, Jr. for his guidance and comments. I would also like to thank my family for their unconditional love and support. 1. See Debit Card Interchange Fees and Routing, 75 Fed. Reg. 81,722, 81,723 (proposed Dec. 28, 2010) (to be codified at 12 C.F.R. pt. 235). There were 37.9 billion transactions in 2009. Id. fees are deducted from the amount taken out of the consumer’s bank account,2 and the remainder is deposited into the merchant’s bank account. Since, normally, neither merchants nor consumers are fully aware of the exact cost of the debit card interchange fees, the cardissuing bank can abuse these fees.3 Even though merchants are aware of the fees, they likely will not stop accepting debit cards because they need to remain competitive in the market, and because consumers want and expect to be able to use them. Before the Durbin Amendment, interchange fees were a percentage of the transaction cost and could be negotiated between the merchants and the networks, such as Visa and MasterCard.4 Obviously, larger merchants with a greater number of transactions were able to negotiate lower percentage fees than smaller merchants.5 Senator Richard Durbin and other members of Congress saw a problem with this, so they proposed an amendment to the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), seeking to “help small businesses, merchants, and consumers by providing relief from high interchange fees for debit card transactions.”6 The Durbin Amendment gave the Federal Reserve Board (Board) the rulemaking power to create regulations for debit card interchange fees so that they “shall be reasonable and proportional to the cost incurred by the issuer with respect to the transaction.”7 The Board was tasked to take into consideration the cost per transaction for the card issuer.8 The final rule adopted by the Board provides that the interchange 2. Fees are not added to the purchase price stated when the consumer swipes his or her card, but instead are deducted from the price stated, so the merchant does not get the full transaction price. See Patrick C. McGinnis, Misguided Regulation of Interchange Fees: The Consumer Impact of the Durbin Amendment, 25 LOY. CONSUMER L. REV. 285, 286 (2013). 3. This was true before and after the Durbin Amendment. See infra Part III.C. 4. See Richard A. Epstein, The Constitutional Paradox of the Durbin Amendment: How Monopolies are Offered Constitutional Protections Denied to Competitive Firms, 63 FLA. L. REV. 1307, 1315 (2011). The interchange fees were not negotiated between merchants and the card-issuing bank. Id. Networks also had the ability to create categories based on the type of merchant or the transaction volume. See Debit Card Interchange Fees and Routing, 75 Fed. Reg. at 81,723. 5. A merchant is able to negotiate the fees with its bank, and the merchant’s bank and the card-issuing bank can negotiate their fees. Interchange Myths and Facts, MASTERCARD, www.mastercard.com/us/merchant/pdf/021208 MythsFacts.pdf (last visited Apr. 6, 2014). To avoid thousands of separate negotiations, MasterCard sets “default” interchange rates. Id. 6. 156 CONG. REC. S4839 (daily ed. June 10, 2010) (statement of Sen. Richard Durbin) (“My amendment sought to give small businesses and merchants and their customers across America a real chance in the fight against the outrageously high swipe fees charged by Visa and MasterCard credit card companies.”); see also 156 CONG. REC. S3695 (daily ed. May 13, 2010) (statement of Sen. Richard Durbin). 2014] fees charged cannot exceed the sum of $0.21, plus five basis points of the value of the transaction, as a fraud-prevention adjustment.9 This Note does not suggest changing the goals of the Durbin Amendment, but instead suggests an alteration to the regulations created by the (...truncated)


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Maureen Kane. Durbin Amendment to the Dodd Frank Act: Two Caps are Better than One for Debit Card Interchange Fees, Florida State University Law Review, 2014, Volume 41, Issue 4,