Tag Archives: Dodd-Frank Act

Industry Terms: Debit Cards

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This is the latest installment in The Official Merchant Services Blog’s Knowledge Base effort. Well we want to make the payment processing industry’s terms and buzzwords clear. We want to remove any and all confusion merchants might have about how the industry works. Host Merchant Services promises: the company delivers personal service and clarity. So we’re going to take some time to explain how everything works. This ongoing series is where we define industry related terms and slowly build up a knowledge base and as we get more and more of these completed, we’ll collect them in our resource archive for quick and easy access. Today’s term is Debit Cards.

Debit Cards

A debit card (also known as a bank card or check card) A debit card looks like a credit card but works like an electronic check. The thin plastic card that provides the cardholder electronic access to a bank account at a financial institution. Payments made with Debit Cards are deducted directly from that checking or savings account. If a cardholder uses a debit card at a retail store for example, the cardholder or the cashier can run the debit card card through a scanner — oftentimes the very same terminal credit card purchases are swiped through. This action enables the financial institution to verify electronically that the funds are available and approve the transaction. Most debit cards also can be used to withdraw cash at Automated Teller Machines (ATMs).

Unlike credit and charge cards, payments using a debit card are immediately transferred from the cardholder’s designated bank account. This difference is key in one sense, as it creates a completely different set of protocols and standards for debit transactions in the payment processing industry. This can be seen most recently in the Durbin Amendment of the Dodd-Frank Act. The financial reform legislation set a hard cap on debit card swipe fees. But has absolutely no affect on credit card transactions.

For many consumers, the card they carry can be used as both a credit and a debit card when presenting it at a retail store for purchase or using it online. Oftentimes, a consumer is asked to choose between credit or debit.

For the consumer the distinction can have this impact:

  • The card’s individual rewards program can vary depending on debit or credit. In many cases, a credit transaction reaps greater points  or rewards from these types of programs.
  • A debit transaction can allow for cash back right at the point of sale.
  • A credit card transaction can have stronger protection. It takes time before it is “batched” out by the merchant. And the credit cards themselves have more fraud protection layers than debit cards typically have.

For the merchant and for the banks involved the impact is this:

  • The transaction network that the purchase is run through is separate for debit and credit.
  • The fees associated with the transaction are different. After Durbin, the fees face a hard cap ceiling on what the merchant can be charged. Credit has no such ceiling and so smaller transactions — say purchases under $10 — can end up costing a merchant a bit more in fees.

The distinction between credit and debit was stronger in the 1980s and 1990s, but it still exists. It’s worth knowing what your options are as both a consumer and a merchant.

Durbin Amendment Ready To Go [2023 Update]

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The Official Merchant Services Blog continues to keep its finger on the pulse of the Durbin Amendment media buzz. The legislation that marks regulation that caps debit card swipe fees begins to take effect on October 1, 2011. And there’s still a lot of scrambling from various media sources to try and predict how banks, merchants and consumers will be impacted by the cap on the billion dollar payment processing industry.

Host Merchant Services has been ahead of the curve in both its analysis of the legislation and its reaction to the legislation.

Today, The Official Merchant Services Blog takes a look at two different articles discussing the Durbin Amendment and the changes it brings.

Banks Plan to Recoup Durbin Losses With Other Fees

The first article comes from mainstreet.com. It’s a pretty standard discussion of the most predicted reaction: Banks will react to the losses that the Durbin Amendment cap places on their swipe fee revenue from previous years by creating new service fees for debit card use. So instead of charging per swipe, the banks move the charge directly to the cardholder as a service fee for having debit card services available to them.

The article cites a robust number of debit card users in the U.S.:

“Americans sure love their debit cards. Between Visa  and MasterCard there are more than 520 million debit cards in use nationwide today. “

That frames the basis of why banks are working to come up with a reaction to the Durbin Amendment. With that many debit card users in the country, there are billions of dollars in profit being cut into with the swipe cap. As the article explains, a quarterly survey of debit card use by financial consumers produced by Manhattan-based Auriemma Consulting Group finds: “banks remain stung by changes in debit card fees (called interchange fees) that reduced the amount of fees banks could charge customers for debit card transactions. The changes, which were triggered by the Durbin Amendment in the Dodd-Frank financial reform bill, basically cut debit card transaction fees in half, the ACG reports.”

The article goes on to explain how many banks are wary over the consumer backlash that could result from charging monthly fees for debit card use and scaling back or restricting reward points programs. The article quotes  Ed Lawrence, director of the debit marketing roundtable at the ACG as saying: “The first-movers to institute debit/checking fees in a given market will experience the most scrutiny and possible attrition, along with negative press; as others follow, customers will have fewer places to move to.”

The conclusion drawn from the article is that Durbin puts the banks in a position where they have to react with changes in how they offer debit card services. And the most likely choices are consumer fees for debit card usage and/or reward points programs being restricted or removed. The banks know these choices will be unpopular with consumers but there’s likely to be a domino effect where once a few banks do it, many more will follow suit, leaving consumers with less and less alternatives.

Some Tips On Dealing With Durbin

The second article comes from USA Today’s Money section. Sandra Block offers some insight into Durbin that mirrors much of the insight every other article about Durbin that The Official Merchant Services Blog has reviewed. But Block offers consumers advice on how to deal with the changes that Durbin is going to bring to their wallets: “The good news: There are numerous ways to avoid these fees. Some tips …”

Block offers four basic tips for consumers to do in response to their bank’s reaction to the Durbin Amendment.

  • Tip 1: Forget about interest checking accounts. Block notes that the increased cost of maintaining this type of account ($5,587 for the interest account vs. $585 for the non-interest account) isn’t worth the 0.08% interest the account offers.
  • Tip 2: Set up direct deposit. Block notes that many banks offer to waive checking account fees for customers who set up direct deposit.
  • Tip 3: Consider switching to a small bank or credit union. Block notes that banks and credit unions with assets lower than $10 million are exempt from the Durbin Amendment changes.
  • Tip 4: Watch out for Debit Card fees. Block’s final tip is for consumers to pay close attention to their debit card fees. Many banks may not change immediately and be slower to react to Durbin so consumers should be aware of the details of their statements going forward.

The Official Merchant Services Blog keeps finding the same theme that the media is bringing up about the Durbin Amendment. Banks do not want to lose the billions of dollars that their transaction fees were bringing them prior to the swipe fee cap. So they are going to find ways to move things around to keep the revenues coming in. And many of the proposed changes are ideas that will end up being shouldered by the consumers. The demographic that this finance reform legislation was initially supposed to assist.