Durbin Amendment Will Change Everything

Last week, I introduced you to the Durbin amendment to the new financial reform regulation winding it’s way through Congress.    As a credit card expert and consumer advocate it was immediately obvious to me that if passed, this legislation will radically change the nature of nearly every purchase everyone makes in the future.

Since then, I have marveled at the relative silence of the credit card and banking industry as well as their friends in Congress.    Only now is the mainstream media starting to pick up on the changes that will affect us all if this passes.

Ron Lieber at the New York Times is one of the best personal finance writers out there.    A week after Durbin passed, he wrote this article about the broader implications of the financial reform legislation.  Lieber writes:

The Senate bill contains an amendment with provisions that could affect how you use your credit card. You have probably encountered those irritating handwritten signs that forbid card use unless you’re spending more than $10 or so, even though stores are generally not supposed to do this. The bill would allow such minimums, as long as stores were not setting minimums for, say, Bank of America’s credit card but not Chase’s. Merchants would also not be allowed to set different credit card spending minimums for, say, a Visa and MasterCard.

However, stores would be able to offer discounts based on what card a customer was using. So someone with an American Express card, which often costs the merchant more than other cards, might pay the full sticker price of an item that costs $100, while Visa and MasterCard holders could get a $1 discount.

The bill specifies that cash discounts are acceptable, as are lower prices for people who use debit cards.

This is shorthand for chaos.   Every store will have different discounts/surcharges for various forms of payment including cash, checks, debit, Visa, Mastercard, Amex, etc.   The “price” on the shelf will be subject to change depending on what’s in your wallet.

Will Merchants Cut Prices?

Merchant back groups like to claim that interchange fees are adding 2% to the cost of everything, but people like myself and Lieber are extremely skeptical that consumers will see any savings.   “Somehow I doubt that merchants would throw a parade and immediately cut all prices by half a percentage point on every item on the day this bill goes into effect, if it comes to pass.” says Lieber.

How We Got Here

Banks were making huge profits off of penalties, fees, and other gimmicks like double cycle billing, unit the CARD amendment outlawed most of their unsavory practices.   They compensated by increasing interest rates and tightening credit lines to all but those with the highest credit scores.   They counted on making money off of the “deadbeats” who pay their bills in full to avoid interest.  The way they make money on people who generally pay no interest or fees is through interchange fees charged to merchants, which can be as high as 2-4% of a transaction.  Deadbeats love cash back and reward cards, and banks splurged on sign up bonuses to entice them.   Essentially, banks were giving their best customers a cut of their interchange fees, which admittedly were far above their costs.

Looking A Few Steps Ahead

All was going well until the Durbin Amendment.   Merchants financed a portion the credit card industry, while benefiting from the money placed in consumers hands to their goods and services.   Rewards incented  consumers to choose their credit cards.   In a post-Durbin world, customers would be penalized for using their credit card, making reward cards a poor value.   The deadbeats will cut back on credit card spending at the same time others are moving to debit cards as well.   Less interchange fees will mean less rewards, further devaluing credit cards as a method of payment.    I would expect to see merchants promoting other, less secure,kinds of payment such as Paypal, or bank transfers.

Bad News For Everyone, Except Merchants

Banks will lose as, interchange fees, their current profit center will be in decline.    Consumers will loses as banks try to jack up rates and fees to compensate.    I don’t see any other long term outcome than the marginalization of credit cards as a form of payment.    The Durbin Amendment destroys the business model for merchant supported payment systems.    The future will be consumer financed payment systems.   One price for cash, another for Visa, another for Amex, and so on.

Worse, the market suffers in the chaos.    Every store, every website, every restaurant will now have an array of different policies for different forms of payment.   Prices will be a starting point, an estimate of how much something might cost, depending on the fine print at the cash register.  Every quart of milk purchase will look more like a rental car contract.

Merchants Win

They will get pretty much an instant 2% revenue increase for duping Congress into screwing up our markets.    Thanks guys.