One piece of the financial reform legislation that passed through both houses of Congress last week included the Durbin amendment.
But despite the headlines being made by large banks such as Bank of America (BAC), it is regional banks that may suffer the most.
The Durbin amendment, as it’s known for Sen. Richard Durbin, D-Ill., gives merchants the option to offer discounts to customers who pay with cash or check. It also allows retailers to set a $10 minimum on credit card purchases. And more significantly, it gives the Federal Reserve authority to regulate swipe fees paid by merchants on debit card transactions, limiting fees to what is “reasonable and proportional” to the cost of the transaction.
But in their earnings announcement last week, Bank of America detailed the impact of the Durbin amendment, explaining how the measure will cut into its earnings.
Bank of America executives said the new rule would reduce fees earned from debit cards anywhere between 60% and 80% starting in the second half of 2011. This year, the company said it expects to produce $2.9 billion in revenue from that business.
Several analysts slashed their earnings outlook for the company, and Bank of America’s shares have fallen 10% over the past two sessions.
Since Friday, analysts have been recalculating the cost to banks affected by the new rule.
“We now fear that the Durbin bill could have a great negative impact on bank revenue than we had originally estimated,” BMO analyst Lana Chan wrote in a note to clients Monday.
Other joined in on the pile-on, including veteran banking analyst Richard Bove and Goldman Sachs’ Richard Ramsden, who announced his decision to remove the firm from his “conviction buy” list.
But it’s not Bank of America — or other top lenders such as JPMorgan Chase (JPM, Fortune 500) — that are expected to be most heavily affected by the new rule.
Rather, the biggest hit was expected to fall on major regional players such as Regions Financial (RF, Fortune 500), KeyBank (KEY, Fortune 500) and Fifth Third (FITB, Fortune 500). Each institution generated over 3% of their overall revenue from interchange fees last year, compared to Bank of America’s 2%, according to Chan.
Analysts suggested that perhaps the company most exposed to the new measure was the Minnesota-based lender TCF Financial (TCB). In 2009, more than 10% of its revenue came from interchange. FBR’s Paul Miller projected Monday that TCF’s earnings could fall by as much as 40 cents a share as a result.
Debit card fees represent a $20 billion a year business with Visa and MasterCard controlling 80 percent of the market, according to a summary of the Durbin amendment. Exempt from the transaction fee regulation are government-issued debit cards (unemployment insurance, child support) and prepaid, reloadable cards.
