The Durbin Amendment and Digital Banking

One of the most controversial—or at least most recently mediafied—portions of last year’s Dodd-Frank Wall Street Reform and Consumer Protection Act was built in Illinois, if not Chicago itself. The “Durbin Amendment,” introduced by our own Senator Richard Durbin (D-IL), has raised more recent rancor in the banking industry than just about any other provision of the massive reform bill.

The Durbin Amendment directs the Federal Reserve to limit fees paid on debit card transactions. The limits are scheduled to go into effect in July, unless the banking industry is successful in seeking a delay.

Listening to banks, you would think that the amendment brings about the end of the payments system as we know it. The industry puts the cost to banks of the amendment’s caps on debit fees at some $12 billion a year.

Merchants, however, stand to gain margin from the lower fees. The fees merchants pay on debit- and credit-card fees (the more expensive of the two) have been a long-standing source of resentment to retailers.

[Digital Transactions reported on May 12 that the Durbin ­amendment will go into effect, though perhaps a little later. Its report also contains interesting commentary from former U.S. Senate Banking Committee chairman Christopher J. Dodd, who now heads the Motion Picture Association of America.]

Not a Bad Thing
The Durbin Amendment may well be the beginning of the end of the payments ecosystem as we know it, and that’s not a bad thing. Durbin can also be seen as the regulatory harbinger of a coming shift in power in the payments area, as traditional money and banking transitions to digital money and banking.

It’s a continuation of the power shift in business to internet-based ecommerce, where the power of the traditional players is waning in favor of alternate digital payment providers, which very roughly fall into the overlapping categories of mobile, person-to-person, “electronic wallet,” and digital cash.

The darlings of digital business—Apple, Facebook, Google and others—also play a role in the shift. Some in the digital banking constituency believes that the banking industry should worry about their ability to capture payments revenue. As one of my favorite banking writers, Chris Skinner, wrote in BAI’s Banking Strategies, banks should worry about companies such as Google, Facebook and Amazon because “they are all now pointing their information leadership at money.”

So you may think that Apple, Google, and Facebook would be all for something that could put them on the digital high ground, where consumers supposedly rule. You would be wrong. Those companies are concerned that payments networks, seeking to cut costs, will route traffic through less secure networks. (For the sake of completeness, PayPal’s take on the Durbin rules is that they will have a neutral effect on its business, which mostly generates revenue from higher credit-card fees.)

Payments Power Shift
Power in digital payments is shifting away from banks and toward alternate payments providers, at least for the moment. The shift will not look like it has in the publishing, music, or media businesses, as banks guard the coveted entry to the payments system, regulated by the Federal Reserve, which is more a friend to its member banks than a foe.

Anything else would be too risky. Even as it is, the risk of fraud in emerging and alternative payments schemes is one of the major barriers to adoption—and opportunities for digital entrepreneurs.

Still, the Durbin battle is the largest public battle of the in a shift in which payments power moves to the benefit of merchants and consumers. However it ends, the digital banking war will wage on for some time to come.

More Information
For more of the basics on the Durbin Amendment, see “The P2P Key to Recapturing Revenue ‘Lost’ to Durbin” from Payment Pathways (a Canright client).

As an example of how far the Durbin Amendment has permeated into public discussion, National Public Radio aired a consumer introduction this week, positioning the debate as a battle between banks and retailers.

The payment experts at Glenbrook Partners provide a more detailed industry analysis of Durbin.

As for Dodd-Frank itself, the law firm of Morrison & Foerster has produced an excellent Dodd-Frank Cheat Sheet.