Since it went into effect in October of 2011, the Durbin Amendment changed the architecture of swipe fees for debit card transactions. Its impact on the hospitality industry is mostly felt by restaurants where debit cards are most commonly used, and its subsequent effect on the supply chain of payment transactions within the industry is difficult to ascertain.
Not so simple economics
The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 imposed regulatory measures to protect the interests of consumers who fell victim to financial institutions imposing fees and practices within financial services transactions. A last minute change to such regulatory reform was the Durbin Amendment, named for its sponsor Senator Dick Durbin of Illinois, which became a law on October 1, 2011. The amendment limits interchange fees or swipe fees — the fee charged to merchants every time a customer pays with debit cards issued by banks. Specifically, it capped debit card swipe fees at $0.21 per transaction and .05% of total transaction cost. It also enabled merchants to impose a minimum transaction value of $10 on bank credit card transactions. Merchants could accordingly offer incentives to consumers who pay with cash or debit cards.
The 21 cent cap was higher than the Federal Reserve’s initial proposal of 12 cents. The average swipe fee prior to the Durbin Amendment was approximately 44 cents per swipe. For the hospitality industry at large, payment cards are the predominant customer payment medium, but the Durbin Amendment chiefly affects debit cards, which are used at smaller to mid-sized restaurants, and their usage is on the rise.
According to the Federal Reserve Bank of Philadelphia’s 2010 Visa Panel Payment Study, debit card usage at mid-priced restaurants jumped by 22 percentage points over a ten year period (from 7 percent in 1999, to 29 percent in 2010). The study stated that “debit has also gained a substantial share at quick-service restaurants, accounting for 33 percent of receipts in 2008 compared with less than 2 percent in 1999. During the same 10-year period, use of cash declined from 87 percent to 50 percent at quick-service restaurants, and credit card use increased from 1 percent to 15 percent.” Lodging and hotels, however, are less affected by the Amendment as credit cards are more commonly used and account for some 81% of hotel payments according to the same study.
Transaction processor Heartland Payment Systems (www.heartlandpaymentsystems.com) says that more than half of its payment card transactions for the majority of its restaurant clients are processed using debit cards and have benefitted, but not in all instances and not nearly enough. To ensure that their clients see benefits they advocate an interchange-plus pricing model that passes interchange fees directly to the merchant and charges a separate fee for processing charges. This helps merchants clearly see if they are actually getting card brand fee reductions as the legislation intends.
Associations push for reform
While the National Restaurant Association (NRA) (www.restaurant.org) is pleased with the reduction to 21 cents plus the .05% of the total transaction amount, they are disappointed that the initial proposed cap did not prevail. The NRA believes that $11 is the break point. If the transaction is less than that, then the existing interchange fees after the Amendment is still a burden as a percentage of the sale. The NRA is joining forces with other industry associations such as the Merchant Payments Coalition (www.unfaircreditcardfees.com) in suit against the Federal Reserve and believes that the legislation doesn’t serve to breed competition with the Visa and MasterCard networks like it should.
“While the Federal Reserve’s rule significantly brought down debit swipe fees for many merchants, some small businesses will pay higher fees on smaller ticket transactions — evidence that the Fed provided card networks like Visa and MasterCard too much latitude to increase rates well above a reasonable and proportional level,” said Scott DeFife, executive vice president of policy and government affairs for the NRA in an earlier statement.
“The hospitality industry has not, as yet, presented a unified front on the Durbin Amendment and similar actions,” says business attorney Robert Braun, partner, Jeffer Mangels Butler & Mitchell LLP, (www.jmbm.com) Los Angeles, California. “We also have to consider whether there will be significant federal legislation in an election year, when attention is being drawn elsewhere. We might be looking, however, to the impact of implementing regulation and to legislation adopted by states, which could have an impact on credit card transactions.”
It still may be too early to see the net impact of the Durbin Amendment on industry supply, demand and new anti-fraud technology that can now be afforded with the interchange fee savings. The restaurant industry could certainly use added technology to combat fraudulent practices.
According to FICO Falcon Fraud Management Consortium’s predictive analytics, the top three merchants are ATMs, grocery stores and automated fuel dispensers, however the top merchant categories for credit card fraud were grocery stores, restaurants and online retailers.
“Consumers are the ones most likely to see a direct benefit from the Durbin Amendment,” Braun adds. “Since they will, for the most part, be paying a much reduced transaction fee for each card swipe, their purchasing power will go up. However, this may be balanced out by the elimination of previously free services, like free checking accounts. It seems unlikely that the savings will be used to cover anti-fraud technology but, the demand, both by governmental fiat and by customers, for secure transactions is so great that turning the clock back on anti-fraud procedures seems unlikely.”