It is rare that small banks get a competitive edge over the giants, but this is exactly what happened as a result of the Durbin Amendment to the Dodd-Frank Act signed into law in June 2010. This act was largely designed to allow the federal government to more tightly regulate the financial sector. One of the pieces of regulation added by Senator Richard Durbin of Illinois limits debit card interchange fees for large banks, but not small ones.

The interchange fee is what the processing center can charge the store accepting the debit card purchase. The Durbin Amendment states that banks with over $10 million in assets must charge debit card interchange fees that are reasonable and proportional to the actual cost of processing the transaction. The Federal Reserve was given the power to determine what a reasonable and proportional fee is.

Beginning in October 2011, large banks could only charge 21 cents per debit transaction, plus a small percentage of the amount of the transaction. This puts the average debit card fee at 24 cents per transaction. Small banks, however, are exempt from the rule and can continue to charge their usual debit card fees, which are often two to three times more than what the big banks are allowed to charge.

This legislation helps small banks because they can continue to see the profits they expect from their debit card transactions. The Durbin Amendment gave them an exemption because legislators felt that capping interchange fees for these smaller banks would put too much of a financial burden on these smaller banks, many of which have been struggling. However, the banks still worry that merchants will steer customers away from using debit cards, which will cut into their potential profits.

Although the small banks benefit from the Durbin Amendment, the rural businesses that accept debit cards from small banks are getting the short end of the deal. They still have to pay significant interchange fees on debit card transactions because most of their customers who use debit have cards at smaller, more rural banks. Businesses in large cities, on the other hand, generally see debit cards issued by big banks and will have the benefit of the tightly regulated fees.

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