Durbin Rule Costs Banks Billions: Consumers Paying Price?

NEW YORK (TheStreet) -- To paraphrase Dr. Seuss, big banks don't like the Durbin Amendment. Not a little bit.

They don't like it here or there and they don't like it anywhere -- but they especially don't like it where the fee-draining amendment hits banks hardest -- in the pocketbook.

The Durbin rule, green-lit by Congress as part of the Dodd-Frank Financial Reform Act of 2010, and taking effect last October, took aim at interchange fees for debit card transactions. That's the fee retailers and other service providers pay a bank any time a consumers uses a debit card to make a purchase.

The amendment lowered those fees required to banks with more than $10 billion in assets, thus particularly targeting big financial institutions in making sure interchange fees were "reasonable and proportional."

So how did that all work out for banks? According to a new report out this week from CardHub.com, the answer is "not so good" for large banks -- and small ones.

In fact, the rule may not have worked out so well for consumers, either.

According to Card Hub, the Durbin amendment costs big banks $8.06 billion and smaller banks $329.4 million on an annual basis.

Furthermore, interchange fees have fallen by 59.3% for "signature" transactions and 32.4% for PIN transactions, the study reports. On the surface, that sounds like a good deal for consumers. But, like a lot of government initiatives, the fallout from Durbin may hurt consumers has much as help them.

"The effect of the Federal Reserve's interchange fee cap on large banks is really no surprise," says Card Hub CEO Odysseas Papadimitriou, a former Capital One senior director. "From the moment the rule was finalized, it was plainly obvious that large banks were going to take a big hit. The only real questions were exactly how big and how they would recoup their losses. Now we know that it costs them over $8 billion and led them to abolish debit card rewards while increasing checking account fees -- changes that we should expect to be permanent."

Equally surprising is the fact that small banks -- presumably fenced off from the Durbin amendment -- took a financial hit, too. "The Durbin Amendment's ultimate impact on small banks comes as a surprise given that there is nothing in the legislation that affects them," Papadimitriou adds. "The most likely explanation for this drop is that the significant downward pressure on large bank interchange fees swept those charged by small banks down right along with them."