Durbin amendment has cost banks millions in debit card fees

A 2010 rule that limited the amount merchants can be charged for debit card transactions is costing banks millions of dollars and those costs are being passed on to consumers, according to a report from the Federal Reserve Bank.


That report states that banks have demonstrably turned to fee income to make up lost revenue opportunities.   File photo

A 2010 rule that limited the amount merchants can be charged for debit card transactions is costing banks millions of dollars and those costs are being passed on to consumers, according to a report from the Federal Reserve Bank.

Named after Sen. Dick Durbin (D-IL), the Durbin Amendment to the Dodd-Frank Wall Street Reform and Consumer Protection Act caps transaction fees when a bank’s assets total greater than $10 billion, according to the financial information website Investopedia.com. Previously, banks were able to charge an average of 44 cents per transaction, which was calculated as a percentage of the transaction’s dollar amount.

The Durbin Amendment limits the per-transaction surcharge to 21 cents, or roughly half the former average, according to the 2016 annual report of Itasca-based First Midwest Bancorp. An additional 1 cent per transaction surcharge is allowed to help cover cybersecurity and theft prevention, the report said. 

Once the cap was implemented, however, banks started recovering the lost revenue from customers “by decreasing the availability of free checking accounts, raising monthly fees and increasing minimum balance requirements,” according to a 43-page Federal Reserve study titled The Impact of Price Controls in Two-sided Markets: Evidence From U.S. Debit Card Interchange Fee Regulation.


That report states that banks have demonstrably turned to fee income to make up lost revenue opportunities.

“The estimates from all specifications broadly provide evidence that Reg II (the Durbin Amendment) resulted in covered banks increasing prices on affected accounts in an attempt to recover revenue lost due to lower interchange fees,” the study found.

As Table 1 of the Federal Reserve report shows, among banks clearing the $10 billion asset threshold for the Durbin Amendment to apply, minimum balances for three types of accounts increased with the new rule’s passage: interest and non-interest checking, as well as savings accounts. All three types saw their minimum balances increase after the amendment's implementation.

Monthly fees on all three types of accounts also jumped after the regulatory change, with the interest and non-interest checking accounts reporting average increases of $1.29 and 94 cents, respectively.

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Federal Reserve Board First Midwest Bancorp, Inc.

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