The Durbin Amendment Kills DEBIT Card Rewards, NOT Credit Card Rewards


I have recently been getting a flurry of comments for a post I wrote almost a year ago about the Durbin Amendment to the Dodd-Frank financial reform legislation.  At the time I wrote this, it was only a proposed amendment and nothing was certain.

There seems to be a lot of confusion here, as various banks are announcing that they are doping rewards for their debit cards.  What is important to understand is that the Durbin amendment was carefully crafted to only affect debit cards, not credit cards. Yes, a debit and a credit card look the same to the cardholder and even to the cashier at a store.  Nevertheless, the government has proposed restricting debit card merchant fees to a mere 12 cents, and 80% decline in the average debit card merchant fee.

What Does This Mean?

Merchant fees are how banks earn income on every transaction. The larger the merchant fee, the more that the bank has to offer as a kickback to entice customers.  These kickbacks are called rewards.  As a credit card rewards blogger, I like the kickbacks and I don’t feel guilty accepting them. Merchants whine and complain incessantly about merchant fees, yet almost all of them still continue to accept credit cards rather than just cash or checks. That is because credit and debit cards provide value to merchants. Both of them are much more secure than handling cash.  Neither is subject to fraud in the same way that checks are.  Credit cards allow people to borrow money, which promotes sales.

The worst thing that I often hear is that “consumers pay merchant fees in the form of higher prices”.  This is utter nonsense. Prices are set by supply and demand, not by the transaction costs to the merchants. It is so disingenuous of the merchants, the ones paying the fees, to attempt to convince the public that it is really the customer paying the fee.  Accepting credit cards is a cost of doing business.  Some companies only accept credit cards, while others never do. These costs are no more passed on to the consumer than any other cost of doing business from labor to rent to capital.

Now that debit cards have minimal merchant fees, it is clear that banks will no longer offer much in the way of rewards for debit cards.  This would, by itself, encourage people to use reward earning credit cards.  In fact, credit cards have always had more of a reward attached than debit cards, hence my allegiance to reward credit cards.

Another scenario is that retailers will begin to offer discounts for cash or debit cards in order to encourage their use over credit cards for which they pay a higher fee.  One reason that this is unlikely is that Durbin cut out an exemption for smaller credit unions. That means that there is no way that a merchant will know that a debit card will have a 12 cent swipe fee or a higher fee that credit unions are entitled to.

Where Do We Go From Here?

If you are happy with your credit card rewards, they will not change.  If you still get rewards from your debit card, expect them to disappear very soon.  The next time the merchants go to Congress and ask for swipe fee reform of credit cards, know that this will mean the end of credit card rewards, just like it did for debit cards.

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