Durbin Amendment Reduces Debit Fees

Payment processing has come a long way, but more changes are needed.

The Durbin Amendment to the Dodd-Frank Act was enacted on Oct. 1 of last year, setting new debit card regulations that could provide incentive for renters to pay their rent online. The law was written to protect merchants—and, transitively, the consumer—from being gouged by banks on interchange transaction fees.

The interchange fees of 1 percent to 2 percent that banks previously charged merchants were deemed disproportionately high in relation to the actual cost of processing debit payments, and so Durbin requires that these fees be “reasonable and proportional to the actual cost” of processing the transaction. Transaction fees under Durbin are based on a formula, depending on the amount of the transaction, with the result being cheaper fees associated with debit payments.

The Durbin Amendment applies only to banks with assets of $10 billion or more, thus exempting smaller financial institutions, but payment processors report that the new fee caps have already saved merchants a lot of money. Heartland Payment Systems revealed that its portfolio of 250,000 merchants saved more than $30 million in the first three months under the new rules. Banks can be expected to restructure in an effort to make up for the lost revenue, but the regulation makes the environment for debit users more favorable, which means that paying rent online with a debit card is all the more attractive.

David Cardwell, vice president of capital markets and technology at the National Multi Housing Council, tells MHN that, although the payment process in the apartment industry has come a long way in a short period of time, “it’s still a process that’s not as smooth as it should be because of the rules and the costs associated with processing the transaction, primarily through credit and debit channels.”

Cardwell explains the complications that arise when considering the different options a resident has when paying rent. “You go online and you want to pay your rent. If you want to use your credit card you have to then be transferred to another location, or they give you a phone number. And there is a fee that’s charged; it’s not insignificant, it’s not a few bucks. It could be $50. And you have to say to yourself, do I really want those reward points that much?

“The reason you have to go to that different payment channel is: the rules say that a credit card is the same as a dollar bill,” Cardwell says. “You can’t have a different price for cash and you can’t penalize one over the other. Durbin said that you can have a different cash and credit price, but the credit card association says it has to be at the same point of sale, and if it is at the same point of sale then the owner has to eat that fee.”

The fees associated with debit transactions are significantly lower than those for credit, which is why many apartment owners and managers are pushing debit payments and trying to move away from credit cards. “They’ll eat a couple bucks to get that automation,” Cardwell says. “They’re not going to eat 30, 40, 50 bucks—just like you wouldn’t want them to raise your rent 30 to 50 bucks.”

When a consumer uses a credit card to shop online, the associated transaction fees are factored in to the price ahead of time. A lease, on the other hand, is not designed with an online transaction in mind. Because rent payments involve large sums of money—with greatly varying associated fees, depending on payment type—the process can be a tricky one for owners and property managers.

“The industry still has a ways to go to fully realize a smooth process by which debit, credit, direct deposit and ACH can all live in harmony in the same payment channel, whether it’s online or not,” Cardwell says. Nevertheless, “the incentives are huge for owners to find a more efficient, cost-effective way to automate that. The Durbin Amendment and the rules that followed give some incentive for the industry to take a second look at it.”

The Durbin Amendment is still very new, and continued evaluation can be expected from banks, credit card companies and merchants alike. As for the apartment industry, NMHC finds that automation is up significantly and that the trend will continue to climb.

Ten years ago, Cardwell says, “we were not going to be able to do leasing online. Nobody would think of reserving a unit before they could see it. Nobody was thinking of taking payments. Portals were just starting. Nobody had smart phones. I think that we’ve come a long way in a decade, and we’ve become much more focused on the consumer aspect of renting an apartment—not just from the physical amenities, but also how we treat the consumer with regard to communication and payments and everything else.”