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
- 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.
- 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.