Final Ruling on the Durbin Amendment Softens Blow to Debit Interchange Fees

The Federal Reserve Board dulled the bite of the so-called Durbin Amendment, but banks and issuers will still face a limit on how much they can charge in debit card interchange fees.

The Fed on Wednesday issued its final ruling on debit card interchange fees (PDF), a component of the Dodd-Frank Wall Street Reform and Consumer Protection Act sponsored by -- and colloquially named for -- Sen. Dick Durbin (D-Ill.).

Originally set to take effect July 21, limiting banks with more than $10 billion in assets to a maximum 12-cent fee charged to merchants per debit card transaction. The Fed's final ruling imposes an interchange fee cap of 21 cents per transaction and five basis points multiplied by the value of the transaction. It goes into effect Oct. 1.

The Federal Reserve Board also issued an interim final rule (PDF) under which issuers that develop and implement fraud prevention policies and procedures can receive an adjustment of an extra penny on each transaction. All components considered, an issuer could receive an interchange fee of 24 cents per transaction.

In a statement following the Fed's final ruling, Durbin said small businesses will get some relief from the previously unrestrained interchange fees imposed by issuers, and that the result could lead to increased competition, discounts and lower prices.

"I am disappointed, however, to see that the Federal Reserve has yielded to the big banks in certain parts of its final rulemaking," Durbin added. "The inflated cap and extended delay that the Fed announced today will unnecessarily take money out of the pockets of consumers and small businesses and give it to big banks that neither need nor deserve it."

In anticipation of the Durbin Amendment's potential negative effect on fee income, a number of large banks have spent the first half of 2011 limiting or eliminating debit card reward programs. For instance New York-based JPMorgan Chase bank in April specifically cited the Durbin Amendment in a letter to its customers as the reason it could no longer issue debit rewards cards.

The Federal Reserve Board's final rule also prohibits issuers and networks from restricting the number of networks over which a debit card transaction can be processed, and also forbids issuers and networks from limiting a merchant's ability to route electronic debit transactions through any enabled network.

Federal Reserve chairman Ben Bernanke said the interchange rule presented one of the stiffest challenges for decision makers under Dodd-Frank, and that the Fed had received input from upward of 11,000 commenters as it worked to finalize it.

"Congress has directed the Board to accomplish a very difficult task," he said. "I believe the final rule gives careful consideration to the statutory language, the cost data available to us, and the complexities of the debit interchange payment system. The Board plans to monitor developments in the debit card market; that monitoring will include collecting and publishing data related to debit card costs and interchange fees. These data will help the Board, as well as issuers (both large and small), merchants, networks, consumers, and Congress assess whether the statute and the rule are effectively accomplishing their intended goals."