The 500% Markup Banks Got Since 'Reform'

NEW YORK ( TheStreet) -- Those "too big to fail" banks certainly aren't failing on the debit card revenue front.

That's despite the so-called Durbin Amendment, tucked away in the Dodd-Frank financial reform bill passed back in 2010. The Durbin provision, added in October 2011, capped debit card interchange (or "swipe" fees) to 21 cents per transaction.

But that's a "soft" ceiling. Banks can actually charge up to 24 cents per transaction if they include card fraud protection safeguards for merchants and consumers.

Two years later, big banks don't seem to be suffering. According to the Federal Reserve, banks with assets of more than $10 billion (the only banks that face limits with debit card fees) are getting up to 24 cents per transaction on swipe fees, but paying only 5 cents to cover a merchant debit card transaction.

The Fed says big banks handle the most debit card transactions, and thus see lower costs than smaller banks. As it said Tuesday:

Covered issuers' costs of authorizing, clearing and settling debit card transactions, excluding fraud losses, varied greatly across respondents in 2011, with the median issuer having an average ACS cost of 11 cents and the issuer at the 75th percentile having an average ACS cost of 36 cents. Issuers with the highest debit card transaction volume generally had the lowest ACS costs per transaction as reflected in an overall average of 5 cents per transaction. Conversely, issuers with the smallest debit card programs generally had the highest ACS costs per transaction.

Some retail industry groups say banks are actually earning more in revenues than before the financial crisis hit back in 2008, when the old debit card fee limits were in place..

According to the Washington, D.C.-based Merchants Payments Coalition, the five largest U.S. banks earned more than $12.5 billion in 2011, while U.S. merchants paid banks $30 billion in debit card swipe fees in 2012 and consumers paid $460 in extra costs to retailers who were forced to raise prices to counter bank swipe fees.

Why did banks keep making money even after the Durbin Amendment went into effect?

Partly, it's because big banks got creative with other revenue channels. Prepaid debit cards, which aren't covered under the Durbin Amendment and come with big fees, have exploded since the rules went into effect.

Banks have also cut credit and debit card reward programs, cutting another burden on their bottom lines, while taking away a popular consumer banking service. Plus, banks have instituted "maintenance" fees that have replaced revenues lost from debit card reform.

But all that is gravy compared with what some debit card reform advocates say banks are hauling in from swipe fee "reform." According to the Merchants Payments Coalition, banks and credit card companies are enjoying a 500% mark-up in debit card fees at the expense of retailers and consumers.

The MPC does say that the Durbin Amendment protected smaller banks and credit unions from losing revenue, but "the fees paid to large banks by merchants and their customers are five times the actual cost the banks incur to swipe the card."

The group places the blame for the high mark-ups squarely on the Federal Reserve.

"This report shows that the Fed made a mistake in implementing an effective law. Consumers and merchants should be benefiting more from the reforms," says Jennifer Hatcher, a senior vice president at the Food Marketing Institute and a member of the Merchants Payments Coalition.

"No merchants in a competitive marketplace mark up their products and services by 500%," she adds. "They would be put out of business. It should be the same for banks and credit card companies."

Don't expect the debit card fee landscape to change. The Fed has already said it won't act to tweak or change the card rules. Congress doesn't seem to have any interest on a new debate on swipe fees, either.

That's manna from heaven for banks, but just another day in the economic trenches for U.S. consumers.

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