The Durbin Amendment - Effective or Counterproductive?

The Durbin Amendment - Effective or Counterproductive?

The Durbin Amendment, part of the Dodd-Frank Act, was intended to help save consumers money and stimulate the economy by reducing what credit card companies could charge retailers for interchange fees applied when debit or credit cards were used in purchases. Did it work?

Late in 2011, the so called Durbin Amendment became a belated addition to the Dodd-Frank Wall Street Reform and Consumer Protection Act.  Its mandate: to regulate and limit the interchange fees that banks and payment networks charge merchants.  Interchange fees, also known as swipe fees, are charges applied when goods and services are purchased by consumers using both debit and credit cards.  Merchants loathe these fees as they cost them approximately 1% to 3% of total purchases, totaling $50 billion a year.  Ostensibly the revenue generated is used to fund the various payment networks’ technology systems and to provide fraud and risk mitigation.  Despite the cost associated with these endeavors having come down over time, the level of interchange fees has not.  Retailers focused their argument on this fact and posited that a reduction in fees would lead to savings for consumers which would then assist in driving economic growth.  Senator Dick Durbin, an Illinois Democrat, took up the merchant’s cause, and pushed the provision that placed a cap upon the interchange fee per transaction allowed.  The amendment only addressed the interchange fees associated with debit cards, however, leaving the existent interchange fees on credit cards in place.  Given that credit card swipe fees represent approximately half the $3 trillion a year in purchase volume, this omission was puzzling.  Another facet of the law that has proven problematic is the exemption to smaller banks, those with assets of less than $10 billion, from having to comply with the debit card interchange fee cap.  This has led to a two tiered pricing system as large banks have seen their average fee decreased by over 50%, while smaller banks’ interchange fees have remained at the same levels they occupied prior to the enactment of the Dodd-Frank legislation. 

The fight over the passage of the law was highly contentious; debate over its impact has been equally adversarial.  With the average fee now at 24 cents per transaction for large financial institutions, down from the previous 43 cent level, banks have rolled back perks and imposed new fees to make up for the lost revenue.  Large banks continue to be livid over the legislation and have issued a steady stream of dire warnings predicting disaster for the financial services industry and castigating the retailers who pushed for the law.  Of particular concern is the small bank exemption, which the American Banker’s Association (ABA) claims is both unfair and unsustainable. "The Durbin Amendment’s primary beneficiaries continue to be big-box retailers who want to reap the benefits of our nation's payments system without paying for it or passing along their savings to customers as promised," said Frank Keating, president of the ABA. “[the] ABA firmly believes the Durbin Amendment’s small-bank exemption can’t work long-term."  Bill Cheney, president and CEO of the Credit Union National Association, echoed his colleagues’ unease, saying "Credit unions continue to be concerned that market forces will ultimately drive down the fees that the exemption for smaller institutions is intended to protect.”  Both men appear to have cogent points.  Retailers, unburdened by any aspect of the Durbin Amendment requiring them to pass along savings to customers, have, predictably, pocketed the savings instead.  The purported primary benefit of the law, consumer savings and economic stimulus, has thus failed to materialize.  Additionally, with the small banks’ swipe fees nearly double that of the larger banks, the smaller institutions run the risk of having retailers refuse to take their debit card or having to reduce their interchange fees to match those of their more sizable competitors.  The loss of the interchange fee revenue for the large banks is more of an irritant than a major imposition, but for the smaller banks the revenue is sorely needed, particularly in these trying economic times.  The law, intended to help the smaller banks, appears to have placed them in an untenable position instead.

So, in lieu of the predicted savings, what should consumers expect instead from this legislation?  It is, at best, a mixed bag.  Lower prices remain a possibility, but far from a certainty.  Higher banking costs have already been put into place in the form of new fees on checking accounts and the termination of debit reward programs. Additional efforts, like surcharges on debit card holders who don’t maintain minimum balances, can be expected.  One potential positive that consumers sufficiently well positioned should remain prepared to take advantage of is the push by banks towards other products, such as low interest credit cards with highly attractive bonus reward plans, all in an effort to incentivize a move away from debit cards given their increasingly lower revenue producing profile.  To date this would seem to represent the only discernible advantage to the American consumers who were the intended beneficiaries of Mr. Durbin’s laudable but deeply flawed effort.  Regulating only debit cards, and not credit cards, leaves the door open for some customers to save money; those who cannot take advantage of this opportunity, mainly the working poor who use debit cards more than most, will continue to suffer the loss of benefits formerly associated with their card.

Editorial Disclosure: Opinions expressed here are those of the author, and have not been reviewed, approved or otherwise endorsed by any bank advertiser, card issuer, airline or hotel.

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The Consumer Financial Protection Bureau - There is a New Sheriff in Town

The Consumer Financial Protection Bureau - There is a New Sheriff in Town

A recent surge in settlements against credit card issuers that will result in hundreds of millions of dollars being returned to consumers has brought the new Consumer Finance Protection Bureau into the public eye. This development is a strong, positive sign that the government is serious about restoring consumer confidence in our finance system by protecting consumers.

The Consumer Financial Protection Bureau (CFPB) recently announced its latest round of settlements against large credit card issuers, which once again totaled in the hundreds of millions of dollars.  The latest action, this time against Bank of America, levied a fine of $410 million in response to the financial giant’s practice of charging its cardholding customers stiff overdraft fees, often as high as $35 per transaction, when such fees were not warranted.  Bank of America routinely processed debit transactions in order of highest to lowest amounts, instead of chronologically. This practice resulted in their customers having money taken out of their account in amounts that they had not anticipated, thus leading to an overdrawing of their accounts, and an overdraft fee that would not have occurred if the bank had processed the transactions correctly. This latest settlement brings the total to $536 million in fines against an array of credit card issuers with over 5.5 million customers being the beneficiaries of refunds and restitutions.

The CFPB was created as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act with the agency being tasked with the implementation and enforcement of federal consumer financial laws with the intention of promoting fair, transparent, competitive and accessible markets for consumer financial services and products.  This new agency consolidates the consumer financial protection responsibilities previously scattered amongst seven different governmental bodies.  Through the exercise of its enforcement powers, the CFPB has the discretion to craft any appropriate legal or other equitable remedy to address violations of consumer financial protection laws.  The resultant agency is a powerful one, possessing sweeping oversight authority, including exclusive jurisdiction to oversee compliance with consumer protection laws for banks with assets exceeding $10 million.  The CFPB also has limited powers to monitor smaller banks and depository institutions, as well as supervisory authority over such entities as credit unions, residential mortgage companies, payday lenders, educational lenders and credit reporting companies.

The action taken against Bank of America represents only one of several such moves by the CFPB in recent months.  Other efforts to crack down on deceptive credit card practices include penalties against Capital One and Discover. Capital One, charged the agency, “pressured or misled [customers] into buying credit card products they didn't understand, didn't want or in some cases, couldn't even use." Discover was accused of deceptive telemarketing tactics to sell add on credit card products by “implying that the products were additional free 'benefits,' rather than products for which a fee would be applied to their accounts."

In its aggressive efforts against these high profile companies, the CFPB has sent a clear message to the financial services industry, and the public, that large settlements are now the order of the day for companies that have violated consumer protection laws.  Included in a recent CFPB press release was a statement issued by the agency’s director Richard Cordray saying that “we are signaling as clearly as we can that other financial institutions should review their marketing practices to ensure that they are not deceiving or misleading consumers into purchasing financial products or services.” Given the sizable amounts firms have been fined to date, Mr. Cordray’s assertion of there being a clear signal sent is both reasonable and supported by the amount of public discourse his agency’s actions have generated. 

While it remains to be seen whether or to what degree banks and other financial services providers toe the line, the heightened profile of the agency and its stated casus belli can only be viewed as a positive, even by the agency’s detractors.  This is a conversation that we, as a society, need to have.  Consumer protection is a critical aspect of public confidence in our banking system and markets.  Every time the government, in whatever capacity, emphasizes that it is on the watch, ready to stand up and protect the average American customer, particularly in an environment that is as often confusing and complex as the financial services industry, public confidence is reinforced.  Such reinforcement is an absolutely necessary component to the ongoing economic recovery, a recovery that has lagged, in part, because confidence in our finance system is minimal or in many instances entirely nonexistent.

Editorial Disclosure: Opinions expressed here are those of the author, and have not been reviewed, approved or otherwise endorsed by any bank advertiser, card issuer, airline or hotel.

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American Express Bluebird Card Presents a Frequent Flier and Hotel Point Bonanza

American Express Bluebird Card Presents a Frequent Flier and Hotel Point Bonanza

For those consumers aiming to quickly rack up frequent flier miles and hotel points, the Bluebird card introduces huge new opportunities.

American Express recently introduced the Bluebird card.  The card is extensively covered in this article on BestCashCow.  As the article states, the card is a “game changer” in the space of prepaid, reloadable credit cards.  One feature that the card provides is the ability to pay for everyday expenses through the card’s check writing features.  Hence, you can use the Bluebird card to pay for expenses that you might not ordinarily be able to pay with a credit card such as mortgage payments, utilities, condo fees, child support, etc.  The card carries no annual fees, involves no credit check or adverse impact on your credit and can be applied for online here.

After you receive your permanent Bluebird card in the mail, you can begin to add credit to it, and the easiest way to do this is to buy Vanilla Reload cards at an Office Depot location.  Office Depot sells these cards in $500 increments at a $3.95 markup.  Bluebird permits you to load $1,000 (or two cards a day), up to a total of $5,000 a month.

By using a Chase Ink Bold card or a Chase Ink Plus card to purchase the Vanilla Reload cards at Office Depot, you will receive points equivalent to 5 times your purchase up to $50,000 a year.  This article fully details the opportunity in the Chase cards, each of which also provides a new applicant with 50,000 points. 

Hence, by opening either the Chase Ink Bold card or the Chase Ink Plus card, a user can easily accumulate 300,000 Chase Ultimate Rewards points.  Those points are among the most flexible in the rewards industry and can be transferred to all sorts of great airline and hotel programs.  For example, those points will get you 12 trips from JFK to LA in coach class on United or British Airways or almost 23 nights at a Park Hyatt hotel like the Park Hyatt Vendome in Paris!

Even though, the Chase cards are principally aimed at businesses, it is possible to obtain the cards as an individual by registering as a sole proprietorship and using your social security number instead of an EIN, as discussed here.

Open the Chase Ink Bold card here or the Chase Ink Plus card here.

Learn more about other rewards credit cards.

Editorial Disclosure: Opinions expressed here are those of the author, and have not been reviewed, approved or otherwise endorsed by any bank advertiser, card issuer, airline or hotel.

Advertising Disclosure: This site may be compensated for hosting offers.