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
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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)