There’s a good chance if you are a “small” shop merchant or ever buy products from one, like coffee or fast food for example, you have been directly impacted by the now infamous Durbin Amendment of the Dodd Frank Act.

The Durbin Amendment is the legislation that went into effect on October 1, 2011. The idea was to regulate the interchange fees banks charged merchants for processing debit cards. Prior to October 1, the interchange fees averaged $0.44 per transaction. Proponents of the Durbin Amendment, including Senator Durbin himself, claimed that because the merchants were paying less for the interchange fees those savings would be passed on to customers. The reality is, customer savings are being reported like seeing Loch Ness Monster they might exist but no one I have spoken to personally have experienced them. Of course there are a lot of other details that we have already discussed in a prior post about the Durbin Amendment, so we won’t go into those here. Instead lets take a look at the impact the Durbin Amendment has had post the October 1 enactment date, and at what you may be able to expect for the rest of 2012.

As a new law that was supposed to reduce costs for merchants that accept debit cards, the Durbin Amendment has instead sent many Mom & Pop merchants’ monthly processing bills much higher forcing them to reassess the way they do business. In her Wall Street Journal article ROBIN SIDEL reports on one coffee shop owner in Manhattan that stated his choice, “... is to raise prices, discount for cash or get an ATM.” This is not an uncommon response. Merchants who enjoyed lower interchange fees prior to October 1, because a majority of their customer transactions were under $10, have found that with the enactment of the Durbin Amendment their banks immediately raised their fees to the new cap of $0.21. So the banks took on a “no discount” position to help them keep as much of the more than $6 billion they were projected to lose in interchange fees. 

The bank argument for immediately raising fees to the new government mandated cap, is that by charging the higher fees on larger transactions, helped to offset the discounts on the smaller transactions. 

To respond to these higher fees merchants have very few choices. They can stop accepting card payments completely (not very practical in a time when Americans have been programmed for so long to use plastic because of its convenience), they can raise prices and run the risk of losing loyal customers, and they can try to encourage their customers to pay with cash. Many merchants are finding that raising their prices to compensate for the higher interchange fees, and then offering a discount of the same amount that they raised prices, to those customers that pay with cash, is their best option.

The increase in fees are not only hitting brick and mortar merchants either. The ever so popular movie rental choice Redbox will be raising prices by 20% to $1.20 a movie starting this month due to higher costs.

Another response we’ve seen from the banks to the Durbin Amendment is the revision or elimination of debit card reward programs. Unfortunately for the consumer it has more frequently been the latter of the two.

So we have seen an increasing in prices from our merchants. We have seen smaller merchants taking a hit on their bottom line because they don’t receive discounts on their interchange fees anymore. We have seen the elimination of rewards programs with debit cards and we have seen an encouraged shift from the banks to pay with credit cards (that are not regulated the same as debit cards now are), and many merchants are encouraging us to pay with cash instead of of debit cards. The over $6 billion the banks are losing appears to be going to larger retail merchants (who lobbied aggressively for the regulation of interchange fees) and not ultimately to the consumer, which is one of the main premises the Durbin Amendment was passed on.

This year you can expect to see banks looking for ways to make up their lost revenue, and it is likely that you will see more and more merchants switching to a cash encouraged or cash only policy. The Durbin Amendment in practice isn’t living up to the grandiose claims made by its supporters prior to its passing. The Fed really got pushed around by special interest groups on this one, but that’s a story for a different day.