Banks React to Durbin Amendment

When the Durbin Amendment regulating interchange fees on debit card transactions took effect October 1, it appeared that merchants could accrue some cost savings on debit card transactions and perhaps leverage their savings by encouraging customers to use debit cards in lieu of credit cards, which have higher merchant fees. However, even before Durbin took effect, large banks warned that they were not going to absorb lost revenues from reduced interchange rates. The reduced rate is expected to cost banks about $6.6 billion a year in revenue, according to Javelin Strategy and Research.

In response to the Durbin amendment, many banks terminated rewards programs associated with debit cards. Over the past few months many of them announced tests of increased fees for use of debit cards or simply said they were raising fees or actually increased them. For instance, Wells Fargo and J.P. Morgan Chase announced tests of a $3 monthly fee for debit card use. Southeastern regional bank SunTrust has been charging some customers $5 a month on debit card purchases since June. In September, Bank of America announced a $5 monthly fee for making purchases with a debit card — starting next year. Several consumer polls suggested that the fees would most likely dampen the use of debit cards for purchases.

The Banks Reconsider

Many big-bank customers apparently moved accounts to smaller local banks or credit unions. President Obama and Senator Richard Durbin (D., Ill.) — who wrote the provision that reduced merchant debit card fees — criticized the banks. Over the past week all of the banks that planned to implement the fees have retreated from that position. Wells Fargo and J.P. Morgan Chase dropped their tests. SunTrust said it is dropping its $5 monthly debit card charge and will refund the fee to customers who have paid it. Bank of America issued a statement saying it is dropping its plan to charge customers $5 a month. “We have listened to our customers very closely over the last few weeks and recognize their concern with our proposed debit usage fee,” said David Darnell, Bank of America co-chief operating officer.

Is This A Win for Consumers?

All of this does not necessarily help consumers, says Odysseas Papadimitriou, the chief executive of credit card search tool provider CardHub.com. “Banks may be more hesitant to introduce new debit fees now. But they will still have to find ways to increase charges and drive profits,” he told Smart Money, the financial magazine. “The net result is a status quo for consumers. They’re no worse or better off.”

In contrast, Katherine Lugar, executive vice president of public affairs for Retail Industry Leaders Association, issued a statement saying, “Today’s news is proof-positive that consumers remain swipe fee reform’s biggest winners. Bank of America and its big-bank peers are no longer free to fleece merchants and consumers at will. This outcome is just what consumers deserve, what reform advocates predicted and what we will fight to extend to the credit card market.”

To gain revenue banks will likely turn to services where fees are already in place. Customers may see increased checking account charges, inactivity fees on debit cards that aren’t used, and higher fees for bounced checks. ATM fees may increase and receiving a paper statement may cost customers. Free checking will likely disappear altogether. In 2011 only 45 percent of non-interest bearing checking accounts are free, a drop from 65 percent in 2010, according to a survey by Bankrate.com.

“If the banks’ revenue streams are cut in one area, they’ll find a different area to make that up,” Bill Hardekopf of credit card comparison site Lowcards.com told US News & World Report. “New fees could be more subtle, more under-the-radar.”

Effect on Merchants

Online merchants will be in the same position that existed when the Durbin Amendment went into effect on October 1. As we explained at “Understanding the New ‘Durbin’ Debit Card Rates; Exec Explains” and “Credit Card Processing: ‘Interchange-Plus’ Pricing Not Necessarily Fair,” merchants should monitor what their merchant account providers charge them, and look for providers that pass the Durbin debit-card interchange savings to them. Merchants, in turn, can keep the savings from reduced rates themselves or pass them through to their customers via lower prices. They can also offer incentives to encourage customers to use debit cards instead of credit cards.

It is unlikely that banks will be able to impose new debit card fees on merchants. Instead they will focus on their checking account and credit card customers. Banks may raise credit card fees or interest rates for their credit card holders, which could make using debit cards for shopping even more attractive.