My story begins in Florida while visiting family recently and I quite literally “ran” into a question regarding the Durbin Amendment. I was out for my morning run, and this being Florida it was already about 1,000 degrees outside. I planned to run the couple of miles to the convenience store, which turned out not to be very convenient, to buy a bottle of water.
Unfortunately, my perfectly good plan was thrown asunder when I set my $1.50 bottle of water in front of the cashier, pulled out my debit card, only to hear “$5.00 minimum purchase required”. I did not have any cash and I could not run while carrying 4 bottles of water. I was annoyed and decided to just continue my run without the water, nearly having a heat stroke in the process…but at least I proved my point, to who I am not sure.
Once properly hydrated and recovered from my questionable decision making, I set about to research all the good that the Durbin Amendment has brought to me, a user of debit cards. If you recall, when the Durbin Amendment was added on to the Dodd Frank Act in 2010, it was touted as a boon not only to merchants, but to consumers and users of debit cards. By reducing processing costs to merchants, consumers would benefit from lower prices and higher acceptance rates for debit cards.
In looking to see if the Durbin Amendment has been successful, one could say "Yes", banks are definitely generating much less interchange income. But, how does that help me as a card user? The primary benefit consumers were promised was lower prices. The thought being that in a competitive market, merchants would pass interchange cost savings on to customers.
Business Wire did a study on the automobile gasoline industry, which received a combined $1 Billion in savings from the Durbin Amendment’s reduction in interchange costs. This benefit equated to roughly $0.03 per gallon of gasoline, however, it was found that none of this savings was passed on to the consumer.
An issue consumers now face thanks to the Durbin Amendment is the one I encountered in Florida - the inability to use debit cards for any purchase under $5.00. Retailers of low priced goods, such as convenience stores and Redbox, are actually experiencing a processing cost increase. Before the Durbin Amendment these retailers would get a substantial discount from processors due to the lower average ticket amount of purchases. Due to the new regulation, banks and processors have eliminated most of these discounts, hence we have seen minimum purchase requirements and price increases at these businesses. Redbox cited this specific issue as one of the reasons it raised prices by 20% in 2011, shortly after the Durbin Amendment went into effect. These changes in turn, affect unprepared runners trying to purchase a bottle of water so they don’t pass out from heat stroke, not to mention increase the cost of movie night.
While increasing the cost of a movie rental by $0.20 seems pretty minor, there have been far reaching consequences that have primarily had a negative effect to the individual users of debit cards. In a survey done by Bankrate.com, it was found that banks offering free checking services have declined from 76% in 2009, to 39% in 2012. In addition, many banks had begun offering rewards programs similar to credit cards where customers could earn points for using their debit card. By 2011, nearly all of these programs had been discontinued. Many studies have been done showing the impacts of the Durbin Amendment, but the overall theme which cannot be ignored is that consumers are the ones bearing the real cost of this legislation.
So next time you are out running don’t depend on your debit card, but remember the age old maxim, Cash is King!
To read more on how Cash is King, please read the articles from our sister company, CetoLogic: Data Breaches May Lead Consumers Back to Cash by Douglas Ceto, Founder and CEO and Reports of Cash’s Death is Greatly Exaggerated by David Austin, Vice President - Business Development. Both articles highlight that cash is still relevant.
