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Credit Card Fees and the Impact of the Durbin Amendment

Dodd-Frank affects all merchants
The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 certainly sparked fierce debate about government regulation, consumer choice, innovation and entrepreneurship. The Durbin Amendment, a last-minute addition to the Dodd-Frank Act, drastically lowers swipe fees – the fee charged to merchants every time a customer pays with plastic – on debit cards issued by big banks, cutting into the banks’ revenue while, presumably, lowering costs for merchants and therefore consumers. The reduction in fees was significant: the Amendment reduced fees to 24 cents from a previous average of 43 cents, according to a Federal Reserve Board report.

The Durbin Amendment became effective nearly a year ago, on October 1, 2011, and the ramifications are becoming apparent. Banks are offering fewer free or low priced services to compensate for lower revenues, and since prepaid debit cards aren’t covered by Durbin, those cards are becoming increasingly popular. Any merchant that accepts credit cards is significantly impacted by the Durbin Amendment.

Lower swipe charges
Senator Durbin, speaking to a group of reporters in Nashville before the effective date of the Amendment, explained that the new law would be good for merchants: “The retailer will be more profitable. That’s what’s behind this.” Durbin said that the amendment was designed to protect retailers such as gas stations, for instance, who often lose a lot of their profit to debit cards. Durbin added that retailers were likely to pass on their profits to their customers, at least those retailers who are competitively trying to entice you into their stores.

So the law was designed to protect not only consumers, since lower swipe charges should result in lower prices for products and services, but also business owners, especially those who depend on numerous small transactions to survive.

New law lets merchants recover processing fees
Because the Durbin Amendment allows merchants, including those in the hospitality industry, to recoup at least some of the fees they pay to card processors, it should benefit the industry. This may encourage some firms to rethink their prior refusal to accept debit cards because the costs were high, and they could not recoup those fees. That should expand the use of debit cards and, consequently, provide at least some additional incremental revenue.

To charge or not to charge
On the other hand, firms face a dilemma because consumers are likely to object to paying a fee for something that was previously free (or at least seen as free, since the cost of card fees was built into the cost of rooms, food, beverage and services). Firms will have to make the decision to charge, or not charge, card transaction fees. Companies could benefit from the additional revenue, but they will add yet another line to bills, which could alienate some customers. Moreover, some states (like California) still prohibit charging a premium for use of a card, as opposed a cash transaction. While not impossible, it may be difficult to incorporate these fees over large networks. Thus, in the short run, hotels may not be able to recoup charges.

In addition, the reduction in credit card and debit card service fees are expected to reduce revenues to the banking industry; banks, in turn, are expected to recover some lost income from their customers — both individual and institutional. Companies could face additional banking costs, as well as the possibility that some consumers may be stretched.

GOOGLE Wallet and beyond
The ultimate impact of the Durbin Amendment make take some time to determine, but there are also other payment issues that could have a significant impact on the hospitality industry. For instance, firms should consider how new payment systems, such as Google Wallet, a mobile payment system, impact their operations. These transactions, which are becoming more and more popular, are likely to have a longer-lasting impact and require more adaptation in operations. They add additional layers of complexity with another party, additional hardware and software, and issues on consumer security and privacy.

Robert Braun is a member of the JMBM Data Security and Privacy Group, and counsels companies in the areas of information technology, data security and privacy, breach notification and remediation, software development and licensing, and electronic commerce transactions. Contact Bob at 310.785.5331 or