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posted on 13 December 2015

Dodd-Frank's Durbin Amendment Produced Unintended Consequences To Merchants

from the Richmond Fed

-- this post authored by Renee Haltom and Zhu Wang

Debit cards facilitate nearly 50 billion transactions annually - so the fees that debit card networks and issuers assess on each transaction are of great interest to merchants, consumers, and, more recently, regulators. In 2010, the so-called Durbin Amendment of the Dodd-Frank Act aimed to lower merchants' costs of accepting debit cards by capping debit interchange fees.

New survey results suggest that the regulation has had limited and unequal effects on merchants. This Economic Brief discusses the causes of these findings as well as the implications of the regulation for end users.

The interchange fees associated with debit and credit cards have long been a controversial issue in the retail payments system. These fees are paid by a merchant to the cardholder's bank (the "issuer") through the merchant-acquiring bank (the "acquirer") when credit or debit card payments are processed. Merchants have complained that card networks (such as Visa and MasterCard) and their issuing banks have wielded market power to set excessively high interchange fees that drive up merchants' costs of accepting the cards. The controversy also has attracted great attention from policymakers, who are concerned that high interchange fees may inflate retail prices and cause welfare losses to merchants and consumers.

In an attempt to resolve this issue, a provision of the 2010 Dodd-Frank Act, known as the Durbin Amendment, mandates a regulation aimed at reducing debit card interchange fees and increasing competition in the payment-processing industry. The Durbin Amendment directs the Federal Reserve Board of Governors to regulate debit card interchange fees so that they are "reasonable and proportional to the cost incurred by the issuer with respect to the transaction." The objective of this legislation was to lower merchants' costs of accepting debit cards and to pass along the savings to consumers via lower retail prices. The Board subsequently issued Regulation II (Debit Card Interchange Fees and Routing), which took effect on October 1, 2011.

[click on image below to continue reading]

Source: publications/research/economic_brief/ 2015/pdf/eb_15-12.pdf

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