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How New Debit Card Rules Could Change Your Next Shopping Experience

Squeezed tightly among everything else in your wallet is likely a debit card. Also known as a bank or check card, debit cards function like paper checks but come in the form of plastic, like a credit card. They are associated with a cardholder’s checking or savings account, whereby money is withdrawn from the account each time the card is used to make a purchase.

Debit cards sometimes carry the VISA or MasterCard logo, making them a widely acceptable payment method. However, they shouldn’t be confused with credit cards. As opposed to the buy-now-and-figure-out-how-to-pay-for-it mentality of credit cards, if a debit card user’s account balance is smaller than the transaction amount, the purchase is rejected, making it impossible for the purchaser to spend money they don’t have.

Because they are convenient and budget conscious, debit cards are gaining in popularity. According to “The Survey of Consumer Payment Choice,” released in April 2011 by the Federal Reserve Bank of Boston, 77% of consumers have a debit card. Additionally, the survey found that debit cards are the most commonly used payment instrument among consumers per month (19 payments per month) – ahead of cash, credit, and checks.

Q: What is The Durbin Amendment and what does it have to do with my debit card?

A: The Durbin Amendment is part of the financial regulatory reform bill passed in 2010 called the Dodd-Frank Act. This provision requires the Federal Reserve– the central bank of the United States whose leaders oversee and regulate our banking system – to set rates for debit interchange fees. Finalized on June 29, 2011, and taking effect October 1, 2011 and April 1, 2012, the final rule caps debit interchange fees at $0.21 cents per transaction, plus five basis points for fraud losses, and $.01 cent if card issuers follow certain fraud prevention procedures.

The relevant question now is whether provisions passed as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act called The Durbin Amendment could slow the use of debit cards.

Q: What are interchange fees and who pays them?

A: Interchange fees, or swipe fees, are an amount of money merchants pay to card issuers (e.g., banks and credit unions) to cover the costs of those things that occur behind the scenes when you swipe a debit card to pay for goods or services. Such costs are for card readers, the technology that transmits card information and reduces your card balance, sending appropriate funds from the bank where your funds reside to the merchant’s bank, etc.

Note that government benefit cards and certain prepaid cards are exempt from the swipe fee limitations set forth in The Durbin Amendment. Prepaid or stored-value debit card are those like a gift card to your favorite retailer, which are pre-loaded – and often reloadable – with a specific account balance that is withdrawn from each time you use the card. Other stored-value debit cards may contain an employee’s weekly paycheck or federal support payments because of a cardholder’s low-income status. The Durbin Amendment affects only those debit cards associated with your checking or savings account, and not prepaid cards.

Q: Could The Durbin Amendment change how my debit card works?

A: It will take a while to know the answer with certainty, but a prevailing thought is that because debit cards have gained powerful traction as a preferred shopping tool among consumers, and because merchants and card issuers have invested a lot of time and money implementing them, that the cards aren’t going away anytime soon. Rather, consumers need to be on alert for any changes that could result in fewer debit card reward programs or new convenience fees assessed by card issuers to make up for lost revenues because of this new regulation.

Q: So if the Durbin Amendment is going to lower the fees merchants pay for me to use my bank debit card, should I expect lower-priced goods and savings?

A: Not necessarily. Debit cards are widely popular throughout the world and lower interchange fees will not dramatically affect pricing.

Q: If I’m not going to benefit in a meaningful way, why should I care about the Durbin Amendment?

A: Merchants currently pay an average swipe fee of about $0.44 per transaction. A small portion of this is shared among the merchant’s bank and VISA/MasterCard (if co-branded). However, most of the fee is directed to the card’s issuer (e.g., the cardholder’s bank). Reducing this amount by about half – per The Durbin Amendment – could make it difficult for issuers to cover all the costs associated with enabling debit card transactions.

This impacts you as a consumer because there is some concern that if card issuers start charging merchants higher fees for other services to cover this loss in interchange income that shoppers might see higher prices in stores or be asked to pay maintenance fees on checking accounts, higher out-of-network fees when you use ATMs, etc., to cover these costs.

There is also talk that once the rules go into effect and once debit cards aren’t as profitable for card issuers that some of the incentives or rewards you currently receive for using a debit card will dry up.

Again, this is possible, but card issuers have spent a lot of time and money convincing consumers to use debit cards. It’s going to be challenging to force a major change.

Q: So what’s the bottom line? What do I really need to know?

A: At the end of the day, there are a lot of advantages for merchants and banks when consumers opt to use a debit card over a paper checks, cash, or even credit cards. For example, merchants receive guaranteed, nearly immediate payment. They also don’t have to worry about employees stealing cash from their registers or about checks bouncing.

However, if card issuers feel they have less of an incentive to promote debit products, they might shift their focus to credit cards. In opposition to this, once merchants start enjoying paying less to accept your debit card over a credit card, they may incent consumers to use them with discount programs or free shipping.

It sounds confusing, we know, but these are also possible scenarios to watch for. So with so much up in the air, we suggest you keep an eye on the fine print in statements you receive from your debit card issuer, and watch for any changes in fee structures and usage agreements.  

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