The landmark digital assets-governing CLARITY Act is under consideration in the U.S. Senate, but merchants are taking issue with a potential amendment to the bill that could alter longstanding debit fee rules.
The Durbin Amendment to the Dodd-Frank Act separated banks into two tiers, with the dividing line set at $10 billion in assets. Banks above that threshold that adhere to Visa and Mastercard rates must cap swipe fees at $0.21 per transaction, plus $0.01 for fraud prevention, plus 0.05% of the transaction amount.
These rules aren’t changing. However, earlier this year, Ted Cruz (R-Texas) and Katie Britt (R-Alabama), proposed the Community Bank Relief Act, designed to strengthen smaller banks and credit unions against the impacts of inflation. Under the legislation, the threshold would increase to approximately $15 billion in assets and would fluctuate based upon the Consumer Price Index.
Although the Britt-Cruz bill was proposed separately a few months ago, merchants are raising concerns now because Britt has introduced an amendment that would incorporate the measure into the CLARITY Act.
“This change would swing about 100 banks and as many as 20 million debit cards from the lower Durbin-regulated debit interchange pricing to the higher unregulated interchange pricing,” said Don Apgar, Director of Merchant Payments at Javelin Strategy & Research. “The overall result will be higher costs to merchants since fewer of the cards they accept would be regulated under Durbin pricing.”
A Boon for Smaller Banks
The higher threshold could benefit smaller banks and fintechs, which have long argued they have been forced to comply with guidelines originally intended for much larger institutions.
For those banks, a favorable rule change may not be far off. The CLARITY Act is a closely watched milestone for the crypto industry, which has faced its own challenges as the legislation inches toward passage. Most recently, a debate over whether crypto firms should be allowed to pay interest to users who hold stablecoins.
Fueling the Debit Debate
Still, the bill appears to be moving forward. Adding the amendment to the CLARITY Act would likely intensify an already longstanding dispute between merchants and financial institutions over swipe fees.
“The argument made by Senators Cruz and Britt is that Dodd-Frank was passed into law over 15 years ago, and by nature of a successful economy banks are growing their assets,” Apgar said. “Interchange fee income from their depositors’ debit card purchases is a significant source of income for most banks. It effectively disincentivizes growth because banks face a significant cut to that revenue as the pass the $10 billion asset mark. This higher break point allows regional banks with more headroom to grow.”
“Regardless of whether this proposed legislation makes monetary sense for banks, it is drawing fire from a wide range of merchant trade associations based on the potential for higher debit card costs, which merchants have long been trying to bring to zero,” he said. “While a growing number of merchants are now passing along card fees to their customers by adding a surcharge to credit card purchases, such surcharges are not permitted on debit cards.”
