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) -- Banks say the Durbin Amendment has cost them billions in revenues, and while figuring out where all the money is going isn't an easy task, one big winner looks to be giant buyout firm

KKR & Co.



The Durbin amendment, named after Sen. Richard Durbin (D., Il.) and part of the 2010 Dodd Frank financial reform legislation, limits so-called interchange fees merchants pay to banks on debit card transactions. It took effect Oct. 1 and has reduced fees to 24 cents from a previous average of 43 cents, according to a May 1 report by the Federal Reserve.

Banks say the controversial amendment by Sen. Richard Durbin (D.-Il.) punished them only to help big retailers like Illinois-based Walgreen.

In its first quarter report for 2012,

JPMorgan Chase


estimated "the effect of the Durbin Amendment will likely reduce annualized net income by approximately $600 million."

Bank of America


said first quarter "card income decreased $371 million primarily driven by the implementation of interchange fee rules under the Durbin Amendment."

Wells Fargo


card fee income was $654 million in first quarter 2012, compared with $957 million a year ago. The bank attributed the difference to Durbin, but said it was "partially offset by growth in purchase volume and new accounts."

A sizeable amount of the banks' lost revenues appears to be translated into savings for the nation's largest retailers, but while several industry giants, including






Walgreen Company



The Home Depot



comment letters to the Federal Reserve

supporting a tough rule aimed at reducing interchange fees, none of these companies appears to have disclosed anything about how much they've saved.

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In its letter to the Fed, The Home Depot said interchange fees were the company's third-highest operating cost after occupancy and wages. The Home Depot CFO Carol Tome told investors during an earnings call in Feb. 2011 that an initial draft of the rule suggested the benefit to the company "could be $35 million a year." Under that proposal, interchange fees were capped at 12 cents per transaction. They were eventually capped at 24 cents, suggesting a benefit to The Home Depot of $17.5 million.

A spokesman for The Home Depot declined to comment on the number, saying the savings was not material.

The Home Depot posted U.S. sales of $62 billion in fiscal year 2011, ending Jan. 29, 2012. That compares to $264 billion in U.S. sales at Wal-Mart for its fiscal year 2012, which ended Jan. 31, 2012. If Home Depot saved $17.5 million, that would suggest savings of $74 million for Wal-Mart, or roughly 1.2% of the $6.1 billion the world's largest retailer earned in 2012. The number may be smaller, however, since according to Gilford Securities analyst Bernard Sosnick, a sizeable percentage of Wal-Mart customers pay cash.

While Wal-Mart's senior director of international payments -- Mario de Armas -- declines to give total savings the retailer realizes as a result of Durbin, he adds that an assumption based on the Home Depot estimate would be inflated. de Armas explains that Wal-Mart is considered a "Tier 1" grocery store within the industry-wide Interlink payment system, offering little to no Durbin windfall since Interlink's actually increased its own rates.

Besides, de Armas adds, "any savings that we have been able to get from debit reform will be passed on to our customers through lower prices."

Spokespeople for Target or Walgreen did not respond for comment.

But the banking industry, through an industry group called the Electronic Payments Coalition, claims the retailers aren't passing on the savings to consumers in the form of lower prices.

"This new law helps no one but giant retailers" while consumers, small businesses, and small financial institutions feel the sting of this misguided move by Congress," the coalition argues on its website. A call to the coalition wasn't returned.

Still, if retailers are reaping big savings, it isn't immediately obvious that they match the losses the banks are claiming.

There are a few possible explanations for this incongruity. First, banks may be exaggerating the harmful effect of the legislation in the hope of gaining sympathy from politicians, regulators or the public, or possibly to provide an excuse to shareholders for poor performance. Second, retailers may be minimizing the savings in the hope of not attracting too much attention, which could lead to pressure on them to lower their prices. A third explanation is that the banking sector is more concentrated than the retail sector, so the benefits to the latter group are spread out too widely to produce an attention grabbing number at any one company.

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It is clear at the very least that the law has created opportunities for certain businesses across a few different industries and sub-industries that they exploit in different ways.

Take merchant acquirers, for example. These companies facilitate debit card transactions, charging a fee to merchants for their services. Acquirers bundle their fees together with the interchange rate, enabling them to take advantage of small or even mid-size retailers unaware that the interchange rate has been lowered. The acquirers can raise their fees by the same amount the interchange has dropped without retailers noticing a difference.

And indeed, that is what most of the merchant acquirers are doing, according to Steven Kwok, analyst with Keefe, Bruyette & Woods (KBW).

"For the most part -- the general industry -- they're keeping the savings," Kwok says of the acquirers.

First Data

, the largest merchant acquirer with 22.6% of the market, attributed a $26 million first quarter increase in first quarter revenue to "lower debit interchange rates as a result of the Dodd-Frank Act," according to a first quarter earnings report.

On a conference call with analysts, First Data's management argued the benefit will be "transitory" due to "the highly competitive nature of merchant acquiring." Spokesmen for the company, which is owned by KKR but makes public financial disclosures because it has publicly-traded debt, declined to elaborate further.

Not all acquirers are keeping retailers in the dark about the lower interchange fees, however.

Heartland Payment Systems


the sixth-largest merchant acquirer, according to KBW research, has made a big point of marketing itself to merchants as an honest broker that passes along the "Durbin Dollars" it says its clients are due under the legislation. Heartland says it has delivered $170 million in Durbin Dollars to retailers so far, and keeps a running tally on its website.

Robert Baldwin, vice chairman at Heartland, says he isn't sure if Senator Durbin is aware that the company is using his name in its marketing pitch, though he believes the Senator would approve of the philosophy behind it.

"One of the negatives when legislators try to influence this market is literally

Durbin didn't know we existed when he passed the law, and Congress didn't know and so they've ended up, there are a number of our competitors who are much more profitable than they would have been absent that. I'm not sure that's something he was looking for. In fact I'm pretty sure it was


something he was looking for," Baldwin says.

If Durbin and Congress weren't aware of the merchant acquirer industry when they passed the Durbin Amendment, they might be especially dismayed to learn that several of the largest merchant acquirers are owned by, wait for it... the banks.

It seems odd at first. JPMorgan CEO Jamie Dimon has been perhaps the sharpest critic of the Durbin amendment, but why should he care if JPMorgan is making back the $600 million it loses in card revenue by raising fees to merchants through Chase Paymentech, the fourth-largest merchant acquirer? The answer appears to be that Chase Paymentech is only able to make back a fraction of what the card division loses in interchange fees.

Still, it isn't hard to understand why Rep. Barney Frank (D., Mass.) -- one of the chief authors of the 2010 Dodd Frank Act--disavows the Durbin Amendment every chance he gets. The amendment appears to benefit a host of different parties, but it isn't clear if it makes any difference to consumers. Whether that means banks deserve to be let off the hook and have the amendment repealed is another matter. To fully understand whether the amendment was successful, one needs, as always, to follow the money.

It won't be easy.

A Durbin spokeswoman did not respond to questions.


Written by Dan Freed in New York


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Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.