Why and How to Distinguish Regulated from Unregulated Debit Cards



Not all laws have their intended consequences, which is something many merchants and consumers alike are painfully reminded of when they swipe their debit cards.

After years of lobbying Congress to regulate interchange fees, which are paid by a merchant’s bank to compensate a cardholder’s bank for the value and benefits that merchants receive when they accept electronic payments, the Dodd-Frank Wall Street Reform and Consumer Protection Act was passed in 2010, along with a last-minute addition by Illinois Senator Richard Durbin, called the Durbin Amendment.



Dodd-Frank and Debit Cards



The act regulated debit card interchange fees for banks with over $10 billion in assets, intending to lower prices for consumers by cutting the costs of retailers. The affected banks and their debit cards are referred to as regulated (or non-exempt, according to Visa’s terminology), while banks with less than $10 billion in assets, such as community banks and credit unions, are referred to as unregulated (or exempt), and so are their debit cards.

The maximum interchange cap for regulated debit cards was set at $0.22 plus 0.05 percent, while the maximum interchange cap for unregulated debit cards remained unchanged at 1.60 percent plus $0.05, with merchant category code, transaction size, and a few other variables still coming into play.

Before the act was enacted, retailers paid an average of $0.44 for a typical debit card transaction, roughly $38. After the act was enacted, the maximum fee for the same transaction dropped to 24 cents, 45 percent less than before.

Predictably, the act “reduced income at large banks by nearly $14 billion a year, or more than 5 percent of core total noninterest income,” as explained by the “Bank Profitability and Debit Card Interchange Regulation: Bank Responses to the Durbin Amendment” report published in 2014. “As multi-product oligopolists, banks had multiple margins on which to ameliorate this effect: raising revenue on other products, reducing the quality of related services, and strategically altering their balance sheets to avoid being treated by the law.

Banks have also begun charging the maximum amount for smaller transactions, which were previously calculated based on a variable percentage of the purchase value, resulting in smaller fees on smaller purchases and larger fees on larger purchases. Naturally, merchants that regularly process smaller debit card purchases have been affected the most. For example, many merchants now have to pay a fee of 21 cents for the same bill that would cost them just a few cents before the Dodd-Frank act.

Interchange fees have increased for merchants that make small-ticket transactions, as networks have eliminated discounts that they previously received, and smaller merchants have not seen any reduction in their merchant discount rates,” stated a study funded by the International Center for Law and Economics at George Mason University.



How Can Merchants Distinguish Regulated from Unregulated Debit Cards?



Merchant account providers often try to entice merchants into accepting a flat rate for all debit transactions. When compared to the maximum interchange cap for unregulated debit cards, a fixed rate of, for example, 0.5 percent sounds very attractive.

In reality, it is a trap for merchants that have no idea how many regulated and unregulated debit cards they accept. A rate of 0.5 percent is a significant markup over the maximum interchange cap for regulated debit cards, 0.05 percent plus $0.21.

Fortunately, our BIN database makes it effortless to distinguish regulated from unregulated debit cards by comparing only two parameters: 4 and 14 from the sample below. If the type is debit and the flag is set to Y, then the BIN indicates a regulated debit card.




Here we have a debit BIN. You need 4th (card type) and 14th (regulated flag, could be Y or N) parameters:




Then apply the following logic:


(Parameter4 = DEBIT) AND (Parameter14 = Y) 


So you have a regulated debit BIN.