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MAG Sponsor Spotlight: Is it time to strip the Fed of its regulatory responsibility for card interchange? (MAG Quarterly- Volume Three, Issue Four)

By Alistair Combes, SVP of Knowledge & Products, CMS Payments Intelligence

December 8, 2015

Flawed implementation, processor absorption, and network fees combine to wipe out Durbin benefits for many merchants - is the Fed conflicted?

Debit card interchange reform in the United States was supposed to provide merchants and their customers with a permanent solution to the ever-growing problem of excessive debit card fees.

However, what was supposed to provide $18B of annual cost relief has been eroded by high caps, fees and exemptions - to the extent that, in practice, the Durbin Amendment fee provisions have achieved little or no benefit for some segments of merchants and resulted in even higher fees for some.

The Durbin Amendment to the Dodd-Frank Wall Street Reform bill was introduced in May 2010 with the anticipation that debit card interchange fees, which averaged 44 cents per transaction, would be brought down significantly to “reasonable and proportional” rates1.

Despite this initial optimism, it wasn’t long before the reality of the regulation came to light.

First, the legislation exempts issuers with assets of less than $10B from the regulation. As of 2014 these non-regulated transactions accounted for around 37.4% of all debit card transactions, so, straight away savings were limited.

The Bernanke Amendment to the Durbin Amendment?

In the final text of the Dodd-Frank Act approved by the Senate, Section 1075 mandated that the Federal Reserve Board would oversee the implementation of debit card interchange regulation and our main concern is that this may have raised a conflict of interest.

Yet it all started well for the merchant community; early proposals from the Board of Governors on 16th December 2010 contemplated fee levels ranging from 7 to 12 cents per transaction - lower caps than most commentators were expecting.

The Fed is said to seldom make significant changes to its draft rules but seems to have diverged from this pattern following the reaction from the financial industry to the proposed “draconian” fee caps. By the time the regulation was signed off on 29th June 2011 (nearly three months later than the original 1st April 2011 deadline), a far higher 22 cents per transaction cap was announced2. The justification for this increased fee appears to lie in the criteria of what should constitute an interchange fee, with criteria beyond direct processing costs, such as bank account management, included in the fee.

Additionally, network exclusivity rules were limited to PIN debit only after it was initially believed they would cover Signature debit networks as well.

Ultimately, the Fed’s primary mandate from Congress is to ensure the safety and soundness of the banks. So in our view, bolting interchange regulation on to this mandate was always going to lead to a conflict of interest. In other countries, interchange regulation has been overseen by competition authorities and specialist payment regulators rather than central banks, and we feel that these structures would have worked better here in the U.S.

The result of the smaller issuer exemption and the decisions made by the Fed, is that average debit interchange fees in the US now amount to 31 cents per transaction. This corresponds to 0.79% of the transaction value on average and is as much as four times higher than first forecast. Indeed, the high cap has also actually led to interchange fee increases for many low ticket value merchants because of the replacement of a predominantly ad-valorem fee with a predominantly fixed fee.

Processors and card networks join the party

Unfortunately, the woe did not end here for merchants. Once the regulation came into force on October 1st 2011, many ISOs and some card processors immediately pocketed a large portion of the savings by not passing them onto merchants in their entirety. For more details about the techniques processors have used to increase profitability in the post-Durbin period see the article ‘Regulation means more margin from merchants’ from our recent Payments Intelligence publication (info at the end of the article).

Furthermore, in the four years since the regulation became active, card networks, most notably Visa and MasterCard, have bombarded merchants with an abundance of new and increasing network fees that have totaled in excess of $3B per annum.

We maintain that acquirers and card networks have been able to take advantage of a failure of the Fed to implement anti-circumvention clauses into the regulation. In other jurisdictions, this has not been the case. In the regulation recently introduced in the EU, for example, a clause has been included that demands that processors offer their merchant clients interchange pass-through pricing3 to ensure that interchange savings are passed on by acquirers. Additionally, China has placed firm restrictions on the network fees that its primary network brand China UnionPay is allowed to charge4.

Durbin’s failures in perspective

When compared to Europe’s interchange fee regulation (IFR), which itself has been heavily criticized, the failure of US regulators to properly implement the Durbin Amendment is truly put into perspective (Figure 1).

Debit card interchange fees in Europe will be capped at an average of 0.2% of the transaction value from December 2015, a quarter of the size of current US fees and, ironically, roughly in-line with what US regulators’ initial assessment of reasonable fees was set to be. Moreover, credit card fees were not included within the scope of Durbin but have been included in European regulation - with the result that, from December, credit card interchange fees will be, on average, nearly seven times higher in the United States than in Europe.


The merchant community were hit by exemptions and high caps before the Durbin regulation was signed off, and a bombardment of fees since it came into force. Figure 2 shows how the erosion of the benefits of the Durbin Amendment has worked in practice. As can be seen, from the initial expectation of $18 billion annual savings, there is now approximately only $3B per annum net benefit left.

We maintain that an entirely new interchange resolution is needed - one which at the very least imposes stricter debit card caps, restricts circumvention and includes credit card fees as well and we would like to see an independent payments regulator appointed along the lines of those operating in Europe.

In our latest publication ‘Payments Intelligence’, we analyze the Durbin Amendment in more detail and identify what the merchant community can do to mitigate the negative effects of Durbin.

You can download the full publication & view sources at


1 Debit card interchange caps are calculated as equal to the costs that issuers incur in providing debit card services

2 This consists of 21c + 5bps, with an extra 1c charge if the issuer fulfils certain criteria concerning fraud prevention




Cardfellow, Nilson Report, The University of Chicago Law School, CMSpi estimates

Figure 1: Post-regulation landscape, by country
08b - CMSpi - Durbin Article. Figure 2

Figure 2: US Durbin Amendment Savings Schedule
08b - CMSpi - Durbin Article. Figure 1