As a cardholder you may not be charged a fee to use your debit card at a cash register, but it is certainly not a free service.

In fact, banks charged retailers an average of 43 cents per swipe until the beginning of 2011. However, after intense lobbying from groups representing both banks and retailers, the government passed the Dodd-Frank Act.

The Catch on Swipe Fees

The Dodd-Frank Act seemed to be the answer to high swipe fees but, there was a small catch in the new law. As part of the Dodd-Frank Act, the Durbin Amendment says that banks and credit unions with assets of less than $10 billion were exempt from this law. They could still charge whatever they wanted per swipe. Indeed, many banks that are under the threshold continue to charge as much as 40 cents per swipe.

Smaller Banks Acquisitions and Tactics

Many smaller banks that are on the $10 billion threshold bubble have decided to hold off on acquisitions that would put them over, instead choosing to wait until they are in a position to go well over the threshold. Since most banks have multiple revenue sources an option they might use would be to move profits from their securities portfolio to take advantage of growth in the loan market. That would reduce the value of their assets on one side to offset growth on the other side. While only a temporary tactic, it will be a legal way to avoid the consequences of swipe fee reform.

Can Market Pressure Bring Down Prices?

Retailers may be rejoicing in the fact that larger banks are forced to reduce their rates but as market pressures increase, small banks may have to explain why they charge more than twice as much in swipe fees compared to the larger financial institutions. Retailers may also have some explaining to do as well since it is unclear if they are passing on their savings to their customers.

Processing debit cards is a way that banks can make money and it is a service that retailers need to provide because customers demand it. Therefore, the banks and other financial institutions have been able to charge whatever they want. However, the Durbin Amendment has made it harder for large banks to gouge retailers while giving smaller institutions the ability to stay competitive – for now.