When a consumer uses a credit or debit card to pay for a transaction, the merchant pays an interchange fee, or “swipe” fee, to the card-issuing bank. Interchange fees cover a variety of expenses, including the cost of customer service, system improvements, online transactions, data security, and card production. Furthermore, interchange fees can vary significantly depending on whether or not a card was present for the transaction, whether the data is complete, the category of merchant, whether the card is credit or debit, the brand of the card, and whether the owner of the card is an individual, business or other entity.
Section 1075 of the Dodd–Frank Wall Street Reform and Consumer Protection Act of 2010, commonly referred to as the “Durbin amendment,” directed the Federal Reserve (the Fed) to regulate debit interchange fees by setting a limit that “shall be reasonable and proportional to the cost incurred by the issuer with respect to the transaction.” The Durbin amendment specifically directs the Fed to consider transactional costs, not fixed costs, and permits an adjustment to account for fraud prevention. On June 29, 2011, the Fed issued a final rule setting the maximum interchange fee for debit transactions at 21 cents per transaction plus five percent of the transaction value, with an upward adjustment of one cent allowable in some cases to account for fraud prevention. Card-issuers with less than $10 billion in assets are exempt from the rule.
While the intent of the Durbin amendment was to prevent card-issuers from unfairly charging merchants and thus, passing higher costs along to consumers, the evidence suggests that it has not helped everyday Americans. According to Fed data, the Durbin amendment has taken away $6 to $8 billion a year from the revenue that banks and credit unions use to serve their customers and members. Despite the exemption for institutions under $10 billion, interchange revenue to credit unions and community banks has dropped, with a 22 percent decline in revenue from PIN transactions and a two percent decline in revenue from signature transactions. There is no evidence that merchants have passed along their savings to consumers in the form of price cuts, and the regulatory burden and loss of revenue for banks and credit unions has led to industry consolidation and the difficult choice to charge for services that were once free, such as checking accounts.