America is hooked on credit cards — and it’s pretty clear why (JPM, TSYS)

What changed in 2010 to open the floodgates on rewards spending? One reason involves a small legislative amendment in the Dodd-Frank financial reform bill that had the unintended consequence of flipping banks’ financial calculus on credit cards vs. debit cards.

Sen. Richard Durbin.Thomson Reuters

The Durbin Amendment — named after Illinois Sen. Richard Durbin — capped how much money banks could charge retailers every time a customer swiped with a debit card to make a purchase. The idea, in part, was that retailers would pass along savings to consumers, though there’s debate as to whether that ever happened.

Big banks staunchly opposed the legislation, and there’s little debate about what happened next: They took steps to recover the roughly $14 billion a year that the law cost them.

Debit card rewards were slashed, and fees for holding accounts connected to debit cards increased by 3% to 5% on average — including monthly maintenance fees, inactivity fees, and overdraft fees.

“For many financial institutions and particularly for many community banks, electronic debit transactions were a very important part of the fee revenue component,” said Thomas Scanlon, an attorney who specializes in advising companies on regulations for financial services and products.

At the same time, banks started investing heavily in credit cards, which were unaffected by the Durbin Amendment.

“I think that’s one reason why American consumers have seen so much advertising from financial institutions to migrate consumers over to credit cards,” said Scanlon, who served as senior counsel in the Treasury Department from 2009 to 2015.