Durbin Amendment

When you pay with a debit card in the US, meaning a card that immediately deducts the money from a checking account, the bank earns money from it too. The store pays a small fee on every payment, which ends up with the customer’s bank. This fee is called interchange. The Durbin Amendment is a rule from 2010 that caps exactly this fee at an upper limit. It is named after US Senator Richard Durbin and is part of a large financial law that was passed after the 2008 financial crisis. Since October 2011, it has applied to banks with more than ten billion dollars in total assets, meaning the large institutions.

Who wins and who loses from the fee cap

Before the rule, banks collected on average about 44 US cents per debit card payment. Afterward, it was around 24 cents. With billions of payments per year, this results in a shift of several billion dollars annually. This money flows from the banks to the merchants.

Supermarkets and retail chains had lobbied for this rule for years. Their argument: the fees were artificially high because a store can hardly choose which cards it accepts. The banks countered that they use the revenue to finance fraud protection and free checking accounts. After 2011, many US banks indeed eliminated fee-free accounts or tied them to minimum balances.

One point of contention to this day is whether customers noticed anything from this. Studies show that merchants passed on only part of the savings through lower prices. Small banks and credit unions are exempt from the cap. Credit cards are also unaffected, which is one reason why US banks have since heavily promoted credit cards.

From legal text to the two-network requirement

The Durbin Amendment appears as Section 1075 in the Dodd-Frank Act, a reform law for the financial market. It requires that the fee be reasonable and proportionate to the actual costs of processing. However, the exact amount was not set by Congress but by the US Federal Reserve. Its implementing regulation is called Regulation II.

The formula has been, since 2011: a maximum of 21 cents plus 0.05 percent of the purchase amount. Those who meet certain fraud-prevention requirements may add another cent. For a purchase over 50 dollars, this results in about 24.5 cents. Previously, the fee was often a pure percentage, which was significantly more expensive for large amounts.

A second, often overlooked part of the rule concerns routing. Every debit card must be able to run over at least two independent payment networks. The merchant can then choose which one to route the payment through, and usually picks the cheaper one. This freedom of choice puts price pressure on the networks Visa and Mastercard. Since 2023, the requirement has explicitly applied to online payments as well.

Why fintech news keeps bringing up the topic

In business news, the Durbin Amendment usually comes up when discussing the earnings of banks or payment service providers. Providers like Chime or Cash App build their business heavily on interchange income from debit cards. Because they operate through small partner banks below the ten-billion-dollar threshold, the cap does not apply to them. This workaround is openly discussed and regularly criticized in the industry.

Currently, there is also a 2023 proposal from the Federal Reserve to further lower the cap to about 14.4 cents. Banks are pushing back against it, while trade associations support it. In parallel, Congress is pursuing an effort to extend similar routing rules to credit cards. This Credit Card Competition Act is often referred to as Durbin 2.0.

For Europe, the rule primarily serves as a benchmark for comparison. The EU has capped interchange since 2015 through its own regulation, there at 0.2 percent for debit cards. A common misconception is that the Durbin Amendment also applies to European cards or to credit cards in general. It applies exclusively to US debit card payments.