How the Durbin Amendment Affects Banks and Credit Card Companies

Michael Dolen  |

The Durbin Amendment officially went into effect on October 1st of last year. Even though banks revised their cards far ahead of that deadline, many have continued to tweak their programs as they adjust in the post-Durbin environment. April 1 will mark the half-year anniversary. Since the law has been in effect, what changes have taken place and what will we see next?

1. Banks Back Away from Debit Card Fees

All of us remember the backlash against big banks last fall, when they announced new monthly fees for debit card usage. Bank of America’s (BAC) plan to charge customers $5 per month probably garnered the most outrage.

Well as it turns out, consumers won this round of the fight. After customers began leaving their banks in droves, which was only made worse by harsh media scrutiny, BofA backed down from the fee. Other big banks followed their lead, including SunTrust (STI) and Regions (RF), who actually had to issue refunds since their new fees had already went into effect.

2. Banks Ramp Up Checking Account Fees

As is the case with most government intervention, rarely is there ever a net gain for the consumer. When a business can’t make money one way, they will simply find another way to offset the loss. This is exactly what we have seen post-Durbin.

Charging customers to use debit cards might not have worked, but in lieu of that we have seen banks ratcheting up the cost of a checking account during the past few months. According to a study by Javelin Research, the new regulation has fueled a 21% surge in checking fees.

3. Emphasis Shifts from Debit to Credit Cards

Do those mega credit card offers have you scratching your head? Well, one of the reasons banks are pushing them so hard right now is because they want debit card users to jump ship… even if that entails a big bribe of cashback, points, or airline miles.

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Even though it may seem illogical, the best cashback card offers are more profitable for banks, despite the fact they have to dole out 1-5% rebates on spending. This is because the Durbin Amendment didn’t impact the processing fees on credit cards, so not only are banks making more money on their transactions, but of course some customers will also incur finance charges. This is one of the reasons why credit card marketing is so strong right now.

4. New Debit Card Fees for Merchants

Although politicians didn’t foresee this, anyone who understands economics would have saw this coming a mile down the road; new fees that debit card processors will have to pay.

Visa’s (V) new “Fixed Acquirer Network Fee” (FANF) will go into effect on April 1. It’s a bit complicated to understand, but in short it is a new monthly fee charged to merchants, depending upon how many locations they have. For example, card-present merchants (brick and mortar businesses) with one to three locations will pay $2.00 to $2.90 per location. The fees go higher depending upon the number of locations and the dollar volume processed. MasterCard (MA) has a similar game plan; two new network fees and a third rumored to be coming to fruition.

In short, these new fees circumvent Durbin and help to offset the lower revenue.

5. Fewer Incentives to Use Debit Cards

As if the cashback credit card promotions weren’t a big enough incentive to switch, many banks are de-incentiving their debit card programs even further, to make them even less attractive to the consumer.

During the second and third quarters of 2011, most debit card reward programs were already scaled back or eliminated completely in order to prepare for Durbin. However since implementation, some banks have continued to water down the rewards and benefits on their debit programs.

One recent example is the Delta (DAL) debit card from SunTrust. CreditCardForum has been buzzing with comments from irate customers, who received a letter last month which said: “As of March 23, 2012, SunTrust will discontinue the Delta SkyMiles Classic Check Card.” Although SunTrust still issues other Delta debit cards, their annual fees are dramatically higher.

As time goes on, expect the last few reward debit cards that are still on the market to face the same fate; either the chopping block or higher annual fees.

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