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1st July 2011

Fed generous to card issuers on Durbin cap

The Federal Reserve has set a cap on debit card fees in the United States of 21 cents plus 0.05% of the transaction value under the provisions of the Durbin Amendment to the Dodd Frank Act. The flat fee is up from a proposed 5-12 cent rate suggested in the earlier paper. The percentage of the transaction fee is an entirely new component and has been introduced to cover fraud cost. It is a response to the banks argument that fraud was the one element that was variable with transaction value whilst the other components are variable with transaction numbers. The cap on fees comes into force on October 1st this year.


Card issuers are to be required to use at least two non-affiliated networks, the option 'A' in the earlier paper. Card Issuers must not ban retailers from using the network of their choice. The retailer choice of network also comes into force in October. The two independent networks must be made available by issuers from April 1st 2012. Complex card such as cards with health benefits and also pre-paid cards get a further year to comply with this part of the regulation.


The Durbin Amendment has been very controversial and only narrowly missed an attempt to have it postponed indefinitely by the Senate. Those opposed argue it is interference with a free market. Those in favour say it will stop unfair charges especially to small retailers which resulted in higher costs getting passed on and especially hurting the less well off. This group also argue that the free market rhetoric was just the big bank lobbying influence. The Federal Reserve itself noted certain misgivings about the law.


Whilst the card issuers still do not like the new law the almost doubling of the proposed cap level will probably keep most from protesting too much - in the short term at least. TCF sought an injunction to delay the implementation of the amendment whilst the constitutionality of the 'price fixing' was investigated. This was denied with an appeal to the federal appellate court in St. Louis also denied.

The enforced reduction in debit card fees could also remove a factor which may otherwise have led to certain retailers discouraging their acceptance and conceivably could lead to card issuers gaining more income from debit cards in the longer term.