Richmond Fed’s Economic Quarterly Explores Interchange Fee Regulations and the Durbin Amendment

The debit card interchange fee regulation introduced by the Durbin Amendment to the Dodd-Frank Act went into effect in October 2011. The regulation limits the maximum permissible interchange fee that a covered issuer can collect from merchants for a debit card transaction. In this issue of Economic Quarterly, Richmond Fed economist Zhu Wang reviews the regulation’s first-year impact on different players in the debit card market. Specifically, he highlights the unintended consequences on small-ticket sales.

The rising interchange fee on small-ticket sales could affect a large number of transactions. According to the 2010 Federal Reserve Payments Study, in 2009 debit cards were used for 4.9 billion transactions below $5, and 10.8 billion transactions between $5.$15. The former accounts for 8.3 percent of all payment card transactions (including credit, debit, and prepaid cards), and the latter accounts for 18.3 percent. Since merchants may have different compositions of transaction sizes, they could be affected differently by the changes of interchange fees. However, merchants who specialize in small-ticket transactions would be most adversely affected.