Banking 101: What Is the Durbin Amendment?

The Durbin Amendment is part of the landmark Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. It may sound like an arcane part of Congress’s effort to reform giant, too-big-to-fail banks, however the Durbin Amendment impacts you every time you swipe your debit card.

The 2008 financial crisis prompted the U.S. government to investigate the role banks played in crashing the nation’s economy and disrupting the financial lives of millions of Americans. Congress’s remedy was the Dodd-Frank Act, legislation which imposed stronger regulations on the financial industry.

Sen. Dick Durbin of Illinois, however, felt Dodd-Frank didn’t go far enough. He introduced an amendment to the act that limited debit card transaction fees. While his intentions were good, the consequences ended up harming consumers in the long run.

Why did Congress pass the Durbin Amendment?

Sen. Durbin believed debit card interchange fees — the fees banks charge retailers when customers use debit cards — were out of proportion to the banks’ actual costs. Banks were charging an average of $0.44 per transaction. Durbin proposed capping debit card interchange fees at $0.22 per transaction plus 5% of the transaction amount.

“The Durbin Amendment gave oversight and control of some debit interchange fees to the Federal Reserve,” said Robert Livingstone, president of IdealCost.com, a national credit card processing negotiation service and merchant advocate. “The idea was sold to the public as a way to regulate the cost of debit card acceptance fees to be more like check acceptance.”

Does the Durbin amendment help consumers?

The Durbin Amendment was intended to lower costs for consumers by regulating banking practices. Sen. Durbin assumed that retailers would pass along the savings from lower interchange fees by cutting their prices.

While some stores in areas with a lot of competition and debit card transactions did cut prices, many didn’t see a large enough savings from the amendment to justify the loss, according to a 2019 study from the University of Pennsylvania Law School.

A 2014 survey of retailers carried out by the Federal Reserve Bank of Richmond found that 98% of respondents maintained or raised prices in the period after the Durbin Amendment interchange fee reforms were implemented.

In some cases, the Durbin Amendment penalized merchants, especially those with lots of smaller transactions. “The debit card interchange rate dropped significantly, but the transaction fee was more than doubled,” said Livingston. Because the amendment switched the interchange fee to a flat rate rather than a percentage, fee rose for smaller transactions. “Many businesses with average customer transactions of $15 or less found their debit card fees went up as a result of the higher transaction fees.”

The Durbin Amendment changed banking

“The Durbin Amendment gutted a major income stream of the banks,” said Livingston. “The big banks were less affected, but many small banks and credit unions went out of business.”

A separate 2014 report by the Federal Reserve estimated bank losses of $14 billion a year. The lost income stream caused banks to make up the revenue elsewhere, and many cut programs that benefited consumers. For example, several banks cut back debit card rewards programs and decreased the availability of free checking accounts by imposing higher minimum balance requirements. In addition, many increased fees for insufficient funds and monthly maintenance for accounts that don’t maintain the new minimum balance.

“In 2009, the year before Dodd-Frank, 76% of checking accounts were free of charge,” said John Berlau, senior fellow at the Competitive Enterprise Institute, a nonprofit public policy organization. “In 2011, just 45% were free.” Berlau alluded to a 2014 report from George Mason University that estimated that the act contributed to a million people losing access to a free bank account.

Low-income families were especially impacted by the consequences of the Durbin Amendment. Many struggled to meet the higher minimum balance requirements or pay the new fees, and some exited the traditional banking system as a result.

Banks with less than $10 billion in assets were exempt from the Durbin Amendment rules, and could continue to charge the higher rates on debit card transactions than their larger competitors. In addition, the amendment didn’t apply to credit card interchanges.

“Any potential loss in revenue on the debit card side was more than made up for on the credit card side,” said Livingston. “Many credit card interchanges have gone up dramatically since the passage of this legislation.”

Researchers at the University of Chicago estimated that the passing of the Durbin Amendment resulted in losses to consumers of between $22 and $25 billion.

Pros and cons of the Durbin Amendment

Pros

• The Durbin Amendment reduced interchange fees from approximately $0.44 to $0.22.
• Retailers saved money on larger transactions.
• Retailers that process a lot of debit card transactions saved money.
• Small banks and credit unions with less than $10 billion in assets were not affected, and did not lose as much revenue as larger banks, helping them to keep their fees lower and potentially attract more customers.

Cons

• Retail prices didn’t drop after the law was passed, the opposite intended effect of the law.
• Some merchants, such as convenience stores, dry cleaners, restaurants, experienced higher debit card interchange fees, especially for smaller transactions.
• Consumers have less access to debit rewards programs and free checking accounts.
• Fees on deposit accounts increased an average of 3-5%, including higher monthly account maintenance charges, insufficient-funds fees and inactivity fees.

What the Durbin Amendment means for you

“[The Durbin Amendment] is a textbook case of regulation that was meant for serving people actually being regressive and benefiting the big guy’s bottom line at the expense of ordinary consumers,” said Berlau.

In 2017, the Financial CHOICE Act was introduced to repeal portions of Dodd-Frank, including the Durbin Amendment. While a decision has yet to be made, consumers can make smart decisions about their financial activities by shopping around for the best checking and savings accounts as well as checking reviews of financial institutions before giving them your business. While the government should work to protect consumers, ultimately we all have to make the best decisions for our financial futures.