Uncertainty with Durbin Amendment impact persists

As the first stage of the Dubin Amendment, section 1075 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (signed into law on 7/21/10), is about to impact the market, a significant amount of uncertainty exists.

The intent behind the amendment was to reduce costs to merchants.  The argument made by nearly 200 merchant associations was that unregulated debit interchange rates were causing merchant costs to rise and, subsequently, consumer prices to increase.

A recent survey by Direct Response Forum indicates that more than 40% of card-not-present merchants plan not to pass along any price reductions to consumers. 56% of the merchants polled were still unsure how they would react.

Although the amendment gives the FED the ability to control a certain element of costs for debit transactions, most merchants are not charged a pass-through cost by their Merchant Services provider. As a result, many of these merchants do not know whether their costs will be effectively reduced by their Merchant Services providers. For this reason, it is understandable that so many merchants are unsure of how to react in relation to consumer prices. If their Merchant Services providers are pocketing the savings, the merchant can’t pass along anything to the consumer.

Despite the immediate uncertainty, I fully expect merchants to see a reduction in cost for debit card transactions over time, as the market has time to settle in. However, in order to protect existing margins, Merchant Services providers’ likely, natural reaction is either an increase in other costs or introduce new fees all together.