The Problem With the Durbin Amendment For Online Merchant Accounts

July 16, 2013 | Author: | Posted in Finance

The Durbin Amendment to the Dodd-Franklin Act has caused quite an uproar among banks, merchants and consumers alike. Originally intended to protect consumers and merchants against insane swiping fees from using a credit card machine or online payment gateway, many argue that it inadvertently caused the opposite reaction. Banks tend to use swiping fees to increase their profits.

While many merchants complain that banks are using what used to be a simple protection against fraud and excessive overhead costs is now being used as a means to take advantage of them, bankers disagree. Banks have turned around profits made by swiping fees and have invested them back into their merchants by offering rewards programs and free checking accounts. As swiping fees receive a lower cap, we’re seeing less and less of these services offered for free. It all follows the law that something can’t be made out of nothing.

The two major goals of the amendment were to increase competition among credit card companies and to cap the amount banks can charge merchants for swiping fees. The desired effect for all of this was to lower prices for purchases that would normally be higher due to the inclusion of swiping fee costs. And since most people these days are using their credit cards to pay for goods and services, including these fees in every purchase, cash or not, makes a whole lot of sense.

Full implementation of the program was supposed to be completed this year, however all the uproar is causing some delay. Retailers just are not lowering their prices as expected, and banks are not receiving their profits that they are used to earning for free rewards and checking programs. As a result, consumers paying for these perks aren’t happy either.

Most small-time merchants, including those with a high risk merchant account, make up for the swiping charges by imposing a $10 minimum on credit card transactions which is now protected under law by this amendment. This encourages customers to pay in cash while still allowing an option to pay with the card. If customers are paying for small items that are really only double or less of the fee required to make the purchase on a credit card, it really makes no sense to do it that way.

Visa and MasterCard previously banned discounts as well for people who pay in cash in their merchant agreements, but now this action is protected under the act. Originally designed with a 7-12 cent fee cap, the Federal Reserve has now set the cap to 21 cents plus 0.05% of the transaction, leaving everyone wondering who really benefited from this amendment in reality.
Guest post is provided by Payment Solutions, Inc., providing online merchant accounts to small businesses. Visit their website for more information.

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