Bank Profitability and Debit Card Interchange Regulation: Bank Responses to the Durbin Amendment

The Durbin Amendment to the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 alters the competitive structure of the debit card payment processing industry and caps debit card interchange fees for banks with over $10 billion in assets. Market participants predicted that debit card issuers would offset the reduction in debit interchange revenue by increases in customer account fees. Some participants also predicted that banks would cut costs in response to the law by reducing staff and shutting down branches. Using a difference-in-differences testing strategy, we show that debit interchange fee income fell for treated banks, leading to a fall in noninterest income. We also find that banks only partially offset this loss with deposit fees. We document that treated banks neither reduced costs nor strategically avoided the $10 billion threshold.