Durban Amendment’s Impact on Resident Debit Payments

Enabling residents to pay rent using debit cards would cost apartment owners less if rules under the Dodd-Frank Wall Street Reform and Financial Protection Reform Act (Pub. L. 111-203) are enacted.

Under the Durbin Amendment, a last-minute addition to the Dodd-Frank financial reform legislation, the Federal Reserve issued a proposed rule to limit transaction fees that are charged to merchants and consumers to 12 cents. The rule applies to banks with $10 billion or more in assets.

“The impact to our industry of that legislation would be lower transfer fees for debit cards,” explains David Cardwell, vice president of capital markets and technology at the National Multi Housing Council (NMHC).

Cardwell presented details of the legislation at a webcast produced recently by MHN, entitled “Capturing Revenue Growth: Cash Flow Strategies that Work.” Sponsored by NWP Services Inc., the webinar addressed the topic of automated payment systems for apartment owners and managers.

The debit card measure contained in the Durbin Amendment, sponsored by Sen. Richard Durbin (D-Ill.), has been described in press reports as a “crackdown” on debit card fees. It directs the Fed to develop rules to ensure that the bank interchange fees charged merchants are reasonable and proportional to the costs involved for the banks to process the debit card payments. The interchange fees of about 1 percent to 2 percent that banks currently charge merchants are said to be higher than the actual costs of processing debit transactions.

Interchange fees, which accrue to the debit card-issuing banks, are established by Visa and MasterCard, which control about 80 percent of the debit market. There are no limits placed on how high the two credit card networks can set the debit card interchange fees for participating banks, but they reportedly want to set them higher as that encourages banks to issue more cards.

Seven percent of rent payments in the apartment industry are currently made by credit or debit cards. And of those, 65 percent are debit card payments. Credit card fees to merchants vary by type and size of transaction and industry. Credit card fees in an apartment industry study range from about $10 to $35 for a rent payment of $1,300, says Cardwell. Debit card fees are significantly lower.

Besides lowering debit card processing costs for apartment owners, from an average of 44 cents to 12 cents per transaction, the proposed rules could increase the use of debit cards by renters, says Cardwell. However, the rules could also conceivably force banks to place a limit on debit card transactions. There are “discussions among banks looking to set limits anywhere from $50 to $100 on debit card transactions … and move consumers with larger transactions to credit cards,” says Cardwell.

Mandated lower debit card fees could ultimately reduce credit card usage. And a side impact could  cause credit card networks to seek ways to increase credit card usage, for example, by lowering credit card fees, because of reduced income from debit cards. Nevertheless, Cardwell says, it is not expected that the industry will move to a greater use of credit cards.

Fed expected to delay rule

At this point, the rules to implement limits on debit card charges are still in limbo. Originally, the proposed regulation was issued by the Fed in December 2010, with a final rule expected to be issued in April and to take effect in July, says Cardwell. However, the Fed is expected to publish rules in July, postponing the implementation until the fall.

That will give time for Congress and the Obama Administration, which have been lobbied by the banking industry, to pass a bill requiring the Fed to consider the incremental cost of debit card transactions in calculating the cap. Congress is considering sending a directive to the Fed to reevaluate the fee limit, says Cardwell, although merchants are also lobbying to keep the 12 cents fee cap.

“Many have argued that the Fed should look at the full transaction costs, including the range of costs borne by the networks and the banking industry relative to the use of credit and debit cards,” says Cardwell. At issue is what losses from costs such as non-payment and fraud would amount to.

In the meantime, Senator Jon Tester (D-Ill.) introduced a bill to delay by two years implementation of the interchange fee cap and a one-year study of the proposed limits. In the House, Shelley Moore Capito (R-W. Va.) would impose a one-year delay. A delay could provide more time for lobbyists to kill the debit card regulation. Under intense push-back from the retail industry, however, Sen. Tester has reduced the proposed waiting period to 15 months. And Senate Majority Leader Harry Reid has reportedly come out in opposition to a delay in the implementation of the Durbin Amendment.

Separately, the Justice Department has settled with credit card networks to allow pricing differences between cash versus debit and credit card payments at the same location. Previously, different payment channels were required to be used for debit and credit cards if the apartment owner wanted to capture fees and incremental costs. The limits on pass-though fees still apply, though.

The regulatory developments still leave many issues with regard to the use of credit and debit cards unresolved. Cardwell says that questions remain, for example, on the use of convenience fees and credit card payment hold procedures.

And until the regulations are finalized, it is still difficult to see what the trends will be with regard to the industry’s use of debit cards. “The expectation is that Congress will do something between now and the end of the July legislative period.” Lobbying from both sides is strong, so it is difficult to see which way things will shake out.

“If Congress fails to act, the [December] rules [issued by the Fed] will take effect,” points out Cardwell. “What we have been told by Congressional staff is that there is motivation on the part of several senators [to take action].”

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