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What Is the Durbin Amendment and How Does It Affect You?

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

The financial crisis that engulfed the global economy a decade ago prompted intense discussion of the role that banks play in our economy and our lives. One of the most impactful outcomes of the debate was the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. When the Obama administration was preparing the Dodd-Frank financial reforms, it needed buy-in from multiple senators to get the legislation through Congress. One of these senators, Dick Durbin of Illinois, didn’t think the bill went far enough to help consumers, so he pushed additional regulations to be included in the reforms, which became known as the Durbin Amendment.

While the purpose of this amendment had good intentions, critics say it may have created unintentional problems for banks. In this article, we’re looking at what exactly the Durbin Amendment changed and how it affects you.

Why was the Durbin Amendment included in the Dodd-Frank Act?

The Dodd-Frank Act added new regulations for nearly every part of the financial sector. Sen. Durbin saw the passing of Dodd-Frank as a chance to rein in debit card transaction fees, which he felt were too high. Since these protections were not in the original Dodd-Frank bill, he added them through an amendment.

Before the government passed Dodd-Frank, banks charged roughly 1-2% per debit card transaction, which led to an average of 40 cents per transaction. The Durbin Amendment set a cap where the most companies could charge is 0.05% of the purchase plus 22 cents.

According to Jared Weitz, CEO and founder of United Capital Source, the government passed the Durbin Amendment partly to improve economic growth. “The idea was that if transaction fees for swiping a debit card were lowered, businesses could decrease overall prices resulting in higher spending among consumers.”

To support smaller financial institutions, the Durbin Amendment made banks with less than $10 billion in assets exempt from the limits. These banks can charge a higher percentage on debit card transactions than their larger competitors.

Did the Durbin amendment really help consumers?

The direct impact of the Durbin Amendment is that it helps retailers save money on their debit card transaction fees. For the amendment to help consumers, stores need to pass these savings to their customers by lowering their prices. A 2019 paper from the University of Pennsylvania found that this does happen in some situations, namely in markets where retailers face a lot of competition and their customers use debit cards frequently.

However, the study did not find an across-the-board price reduction for all stores. Retailers in less competitive markets may be keeping the cost savings for themselves rather than passing the money on to their customers. In addition, stores that do not process many debit card transactions may not see enough savings from the Durbin Amendment to justify lowering their prices.

Finally, the way the Durbin Amendment is designed does not actually lower fees for all retailers. Before Durbin, card issuers charged a higher percentage of sales. Now they charge a lower percentage with a higher flat transaction fee.

“One problem with the Durbin Amendment is that it didn’t take small transactions into account,” said Ellen Cunningham, processing expert at CardFellow.com. “On a small transaction, 22 cents is a bigger bite than on a larger transaction. Convenience stores, coffee shops and others with smaller sales benefited from the original system, with a lower per-transaction fee even if it came with a higher percentage.”

Retailers that see their costs go up could end up increasing their prices, which hurts consumers, the complete opposite of the Durbin Amendment’s goal.

How did the Durbin Amendment impact banks?

By capping debit card fees, the Durbin Amendment sharply reduced how much banks earn on these transactions. The University of Pennsylvania estimates that bank revenue from these transactions fell by roughly $6.5 billion a year after this new law.

One unintended downside of the Durbin Amendment is that since banks are earning less through debit card transactions, they are trying to make up this revenue in other ways. Banks have cut back on offering rewards for their debit cards. Banks have also started charging more for their checking accounts or they require a larger monthly balance. Since Durbin passed, the University of Pennsylvania found that the number of free checking accounts available fell by 40%. Finding a high-earning, low-fee checking account is still possible today, but you need to do more research. You could start here with our list of the best checking accounts for 2019.

Brad Thaler, vice president of legislative affairs for the National Association of Federally-Insured Credit Unions, is not a fan of the Durbin Amendment. “Proponents of the bill promised consumers billions of dollars in savings in the form of lower prices,” he said. “However, retailers pocketed those savings themselves and never passed them on.”

“Not only did consumers fail to see lower prices at the checkout lines, they also saw a reduction in free checking and the elimination of debit reward programs as a result of government-imposed price controls.”

Durbin Amendment pros and cons

Pros:

  • Limits debit card transaction costs: Durbin Amendment reduced the amount banks charge per debit card transaction nearly by half (from an average of 40 cents before Dodd-Frank to roughly 22 cents now.)
  • Saved money for many retailers: The Durbin Amendment capped the percentage banks can charge on a debit card purchase at 0.05%, versus 1-2% before the amendment. A smaller percentage fee helps retailers save money, especially on large transactions.
  • Lower prices for consumers in some markets: A University of Pennsylvania study found that some types of retailers lowered their prices after the Durbin Amendment: retailers in competitive markets as well as those who process many debit card transactions.
  • Does not restrict smaller banks and credit unions: Banks and credit unions with less than $10 billion in assets can still charge a higher fee, so they do not take as steep a revenue loss as larger banks. This could help keep account fees lower at smaller institutions.

Cons:

  • Did not lead to lower prices across the board, as expected: While the government expected consumers to benefit from lower prices, nearly 10 years later, there is no evidence that this has happened except for the specific scenarios listed above.
  • Some merchants saw debit costs go up and may have raised prices: For smaller transactions, the debit card fees can end up higher now versus before the Durbin Amendment. Retailers that process many small transactions (coffee shops, convenience stores, etc.) may have raised prices to make up this cost.
  • Banks cut back other benefits to make up the lost revenue: Fewer banks now offer free checking accounts. They also cut back on rewards for their debit cards, since these transactions are now less profitable. In exchange, they are offering better rewards for credit cards. For example, the sign-up bonus on travel credit cards has nearly tripled in the past 10 years.

The final word on the Durbin Amendment

In the end, while the Durbin Amendment has led to some limited benefits, it has not been the home run Sen. Durbin and his colleagues promised when they passed Dodd-Frank. It’s an example of how if the government doesn’t plan properly, the unintended consequences of a law can do more harm than good. As the government updates Dodd-Frank, like with the recent rollback, perhaps they should review the Durbin Amendment as well to find a better solution for consumers.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

David Rodeck
David Rodeck |

David Rodeck is a writer at MagnifyMoney. You can email David here

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What Is a Payroll Card?

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

Who doesn’t like payday? Your employer hands over your wages in the form of a paycheck or directly deposits funds right into your bank account. For more and more workers, however, payday means getting money on a payroll card. Payroll cards are a type of prepaid debit card provided by employers in lieu of a paycheck or a direct deposit.

According to a 2017 report from the Aite Group, a research and advisory firm, an estimated 6.4 million payroll cards will be in use by the end of 2019. The Aite Group estimates that number will increase to 8.4 million by the end of 2022.

Below, we’ll discuss how payroll cards work, identify a few things to watch out for, and answer some frequently asked questions.

How do payroll cards work?

Employees use payroll cards to withdraw their earnings at ATMs and make purchases anywhere that the card network — e.g. Visa or Mastercard — is accepted. Some cards even offer the option to sign up for online bill payments. But employees who are offered these cards may face an array of fees to access their pay, plus other potential pitfalls.

For employers, printing and sending checks can be expensive and cumbersome. Direct deposits are one way for an employer to avoid the costs associated with physical paychecks, but it’s not a viable option for employees who lack bank accounts.

A 2017 survey from the Federal Deposit Insurance Corporation (FDIC) found that approximately 8.4 million households don’t have a bank account at an FDIC-backed institution.

“There are lots of people who are unbanked or underbanked but still have jobs,” says Bruce McClary, vice president of communications for the National Foundation for Credit Counseling. “If they get a paper check, they have to go to a check-cashing company that is likely to charge a very high fee.”

Payroll cards can be a great way for employers to pay unbanked or underbanked employees, giving them access to their money without the expense of visiting a check cashing firm. However, these cards are not always free of fees and complications.

What are the problems with payroll cards?

Before you agree to sign up for a payroll card, make sure you read the terms and conditions closely and understand how the card works, what fees you’ll have to pay and which usage-based fees may apply. Benefits, drawbacks and fees can vary depending on the card provider. Here are a few things to look out for:

There may be fees to access your pay

New consumer protections and disclosures for prepaid cards and payroll cards went into effect on April 1, 2019. The rules include a requirement to provide a clear chart of common fees to users before they sign up for a card. This should give users a clear, simple fee chart to help them comparison shop and understand what fees they may face when using their payroll card.

Taking the E1 Visa® Payroll Card as an example, here are some of the fees that payroll cards might charge:

E1 Visa® Payroll Card Fees

Monthly Maintenance Fee:

$2.95 in months when there is no payroll deposit on the card; no fee in a month when there is a payroll deposit.

ATM Cash Withdrawal MoneyPass Network Fee:

$1.50; Users get one no-charge withdrawal transaction per month

ATM Cash Withdrawal Non-MoneyPass Network Fee:

$2.50

ATM Cash Withdrawal Foreign Fee:

$3.50

ATM Balance Inquiry Fee:

$0.50

ATM Decline Domestic Fee:

$0.50

ATM Decline Foreign Fee:

$3.00

Funds Transfer Fee:

$2.00

Paper Statement Fee:

$2.00 (per monthly paper statement requested)

Lost/Stolen Card Replacement Fee:

$10.00

Express Delivery Fee:

$40.00

Account Closure Fee:

$15.00

Currency Conversion Fee

3% per transaction

Source:  E1 Visa® Payroll Card

Looking more closely at this fee schedule, it’s clear you can avoid some of the fees by being conscious of how you use the card. The monthly maintenance fee is waived in months when there are deposits on the card from your employer(s), and you get one free ATM withdrawal per month. However, besides the single free ATM withdrawal, it’s difficult to avoid paying fees to access your money, and the account closure fee is high and unavoidable.

Not all cards offer the same features

The payroll card your employer offers may not be a great fit with your financial habits or your normal routine. For example, these cards may be part of large ATM networks and may offer free withdrawals from in-network ATMs. However, like with the E1 Visa card above, there may still be a charge for in-network withdrawals. If there aren’t in-network ATMs nearby, you could wind up regularly paying higher out-of-network withdrawal fees.

Some cards offer additional ways to access your money without fees, such as getting cash back when you make a purchase or offering paper checks that are tied to the account.

Another potential drawback is that these accounts may limit how much money you can keep in the account, and how much you can withdraw or transfer each day.

Holds may be placed on your account for certain purchases

Certain transaction types can trigger a payment hold could be put on funds in your account when you’re using your card for purchases. For example, if you use the card at a gas station, additional funds in your account might be put on hold and it could take several days for the transaction to finalize and the funds to be released. This could mean an extra $100 that’s in your account won’t be available for the following week.

It’s not a stepping stone toward a checking or savings account

“In some ways, [a payroll card] could be working to the detriment of some employees because it’s keeping them from seriously considering opening a checking account at a bank or credit union,” says McClary. “The money isn’t working for you.”

Conventional checking accounts lack many of the small fees that can make a payroll card a bad deal. Additionally, conventional banking options include savings accounts with higher interest rates.

If you need to use this type of card, you may have trouble opening a checking or savings account due to a negative bad banking history — perhaps you bounced a few checks or closed an account that had a negative balance. Remember, many financial institutions offer second chance bank accounts, so don’t let a bad payroll card deal prevent you from pursuing a regular banking account. McClary adds that, “there are programs available in every state to help people open a checking or savings account.”

Pros and cons of payroll cards

Pros

  • Quickly and electronically receive your pay, avoid check-cashing fees and keep your money in a secure account rather than having to worry about carrying cash.
  • Many cards offer free bill pay services, which can make it easier and cheaper to pay your bills versus using money orders or cashiers’ checks.
  • You can manage your money online or with a mobile app (if the card company offers one).

Cons

  • Payroll cards charge fees that can be difficult or impossible to avoid.
  • Very often you have no choice over which payroll card the company will offer.
  • The card might have a maximum daily withdrawal or transfer limits.
  • You won’t earn interest on your money and it may be more tempting to spend money when you don’t separate your savings.

FAQ on payroll cards

State laws may require your employer to give you free access to some or all of your wages at least once each pay period if you use a payroll card. Depending on where you live and the program, your card could waive the first ATM-transaction fee or give you an alternative way to access your wages for free, such as a check that’s linked to the account.

No, you do not. Employers must give you at least one alternative to using a payroll card. However, this alternative could be a direct deposit (rather than a paper check), which isn’t especially helpful for unbanked employees.

If you don’t like the company’s card offering and don’t want or can’t get a bank account, you could sign up for an alternative prepaid debit card on your own — check out our top picks. You may then be able to sign up to have your pay directly deposited onto the card you chose rather than one your employer picked.

Some cards may offer this feature, but others do not. Review the terms of your employer’s program to see if this is an option.

Some cards will let you get cash back when making a purchase, which could be a convenient and free way to get cash from your account.

There’s no credit check or requirement to get or use a payroll card.

Some cards come with zero liability coverage from the card networks, like Visa or Mastercard. Even without that level of protection, you’ll have the same protections as you would with a debit card. You won’t be liable for any transactions after you report your card lost or stolen and you’re limited to $50 of liability for charges that already occurred if you report the card lost or stolen within 48 hours.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Louis DeNicola
Louis DeNicola |

Louis DeNicola is a writer at MagnifyMoney. You can email Louis at [email protected]

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What Are Liquid Assets?

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

You’ve heard it countless times: Build your assets and invest for the future. It’s sound advice, but if you needed money right now, how easily could you turn your assets and investments into cash?

All of your assets have value, but liquid assets are the ones you can quickly turn into cash without incurring any significant fees or penalties. Non-liquid assets either take time to sell or may lose value if you need to quickly turn them into cash.

The money you have in your checking and savings accounts, accessible on demand with a debit card? That’s a highly liquid asset. The RV parked in your driveway? It takes time and expense to sell, making it a non-liquid asset.

All of your assets and investments can be liquidated, if necessary. But before you sell anything, financial planners say you need to take stock of your asset portfolio and understand the liquidity of your holdings.

What to know about liquid assets

Simply put, liquidity is your ability to convert assets into cash. A liquid asset is often defined as cash or an investment with a maturity of 12 months or less, according to Marty Reid, president of Reid Financial Consulting and a certified financial planner. Holding liquid assets is important in case you need cash for emergencies, unexpected expenses or to make big purchases on short notice.

When explaining liquidity to clients, some financial advisors illustrate a pyramid of assets, with cash on hand or money in a savings or checking account at the top as the most liquid, and items or properties that take more time, effort and expense to sell, such as a house or a boat, towards the bottom.

Some assets that can fall into a gray area between liquid and non-liquid are stocks, mutual funds and longer term government securities. You can liquidate these investments for cash, but it could take up to a few days to get your money. You could also face penalties or costs, including brokerage fees, changes in market value, forfeiting interest gains or possible tax implications.

With stocks in particular, when you go to sell, you’re at the whim of the markets and it can take up to three or four days to get your funds. “What if the market is down the day you need money? If the market is down or volatile and you need money, you could be forced to sell and lose money,” said Kaya Ladejobi, a CFP and founder of New York-based Earn Into Wealth Strategies.

Examples of liquid assets:

  • Cash: Hard cash you physically have on hand to pay for expenses.
  • Checking or savings account: Money on deposit with a bank or credit union that you can access immediately.
  • Money market account: A money market, or MMA, is a high-interest savings account that can have check-writing privileges. MMAs may have more restrictions than a typical savings account, including higher minimum balances and limited number of withdrawals.
  • Certificate of deposit: Also known as a CD, this can have a duration that ranges from a few months to several years and offers higher interest rates than savings accounts. If you cash in your CD before the term expires, you could face a penalty on your accrued interest.
  • Treasury bills, notes and bonds: Government-issued securities with maturities ranging from a few weeks to 30 years. Shorter term securities are more liquid than long-term holdings. Interest rates are higher on longer securities. If you sell before maturity, you could lose value and possibly pay broker fees.

What to know about non-liquid assets

Non-liquid assets can be very valuable and marketable. These fixed assets should not be considered as a source of funds for your daily lifestyle or basic needs, but rather as tools to build long-term financial success, said Reid. If you try to sell a long-term asset on short notice, you might not receive the full benefit of their value and you could incur excessive fees associated with a hurried sale. Most of all, the sales process can be slow, which is the very reason they are not liquid assets.

That’s not to say there isn’t a market for these non-liquid assets. On the contrary, when you sell real estate or personal effects like jewelry or collectibles, you can realize considerable financial gains. Likewise, the long-term investment accounts, including IRAs and 401ks, can appreciate over time, but you’d lose value if you sold early, including potentially steep tax penalties.

“Any time you have to pay transaction costs, like using a broker, to sell something, it might be more costly. In addition to that, when you have to find a buyer and the pool of buyers is limited to turn an asset into cash, that makes it challenging,” Ladejobi said.

Examples of non-liquid assets

  • Real estate: Homes and land hold considerable value, but would take time and expense to sell, making real estate one of the most non-liquid assets.
  • Cars, RVs and boats: Recreational vehicles can also have strong monetary value, but take time and resources to sell.
  • Jewelry: Individual pieces and collections can fetch large sums, but you’ll need to find a buyer or possibly a broker to handle the transaction.
  • Furniture and collectibles: Like jewelry, these personal effects can appreciate strongly and may have enthusiastic buyers, but you’ll need to handle marketing and transactions, or work with a broker.
  • Retirement accounts (401ks, IRAs and investment accounts): These long-term investments will grow over time, eventually funding your retirement. If you cash out early (usually before you’re 59 1/2 years old), you could face steep penalties and tax implications. If you take money out of an IRA early, it could be included in your taxable income and incur a 10% additional tax penalty (there are some exceptions).

Why is asset liquidity important?

You never know what hardships or adventures life might throw your way. That’s why it’s important to have liquid assets at your disposal. Many investment advisors often urge clients to keep between three to six months of cash on-hand to pay living expenses, including housing, food and utilities.

Amit Chopra, a CFP and managing partner of Ramsey, N.J.-based Forefront Wealth Planning and Asset Management, often adjusts his advice based on a client’s age and expectations. Younger clients, he said, may want to keep six to 12 months of living expenses on hand in cash in case they decide to pursue a less stable job, such as at a startup, or a personal adventure. “Having a little more cash gives them the flexibility to do that,” he said. With older clients, who may be more established in their careers and personal lives, Chopra recommends setting aside enough cash for six to nine months of expenses.

As you prioritize how much liquidity you need in your financial portfolio, there are some additional considerations, including your tolerance for risk with investments and your long-term financial goals. To determine what’s right for you and how much liquidity you might need, the U.S. Securities and Exchange Commission (SEC) recommends investors take stock of their personal financial needs and determine the right mix of liquid and non-liquid assets. While cash and cash-equivalents are the safest investments — and the most liquid — they also yield the smallest returns.

Liquidity is a balancing act. Having cash on-hand is important for emergency car repairs or medical bills, and to fund lifestyle expenses, such as home improvements or a wedding, Reid noted. He encourages clients to mix liquidity with long-term investments.

“In real estate, they say, location, location, location. With investing, it’s diversification, diversification, diversification. How you diversify depends on your financial position, your risk tolerance level, and your long term and short term objectives,” said Reid.

The final word on liquid assets

When it comes to financial flexibility, cash is king. From there, your personal liquidity plan is a very personal choice, based on how much cash you think you need to be secure and comfortable. There’s no single right answer.

However, when it comes to realizing the value of your assets, not all investments are created equal. If you need funds quickly, with minimal headache and minor expense, cash and cash-equivalents are the easiest and fastest way. If you have more time to put into selling an asset or a longer timeline for needing money, non-liquid assets can be transformed into liquid ones, but it takes both planning and an active market to realize their fullest value. One thing is certain: The cash in your wallet and your checking and savings accounts are the ultimate liquid asset.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Alli Romano
Alli Romano |

Alli Romano is a writer at MagnifyMoney. You can email Alli here

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