July marks the 10th anniversary of the Dodd-Frank Act, which includes the controversial Durbin Amendment—a policy that has done nothing but harm consumers and financial institutions since its inception.
Congress passed the Durbin Amendment based on assertions that lowering debit card interchange fees—small charges merchants pay banks when a customer makes a purchase through a debit card—would allow merchants to lower prices for consumers while at the same time not harming credit unions and community institutions. The payment card market, however, like the popular reservation platform Open Table, is a two-sided market with two sets of customers: consumers and businesses. Government cannot intervene on behalf of one group of customers without taking away from the rest.
Through the imposition of these government price controls on debit interchange fees, the amendment hurts consumers, small businesses, credit unions, and banks of all sizes, while allowing mostly big-box retailers to pocket more than $90 billion in lost interchange revenue.
A diverse coalition of financial institutions, from credit unions to card networks, have fought for a decade to reverse this amendment. As we mark the 10-year anniversary, retailers are lobbying to expand price controls even further, which would further harm consumers, especially low-income individuals. Given the current economic climate, it is time for Congress to rescind the Durbin Amendment and reject calls for its expansion. In the wake of COVID-19, we cannot afford to make any more economic mistakes.
Here is how the Durbin Amendment has failed to live up to its promises over the years:
Durbin Amendment failed consumers and small businesses
Through the Durbin Amendment, the government implemented price controls on debit interchange fees, which then tipped the market in favor of merchants, and caused harm to financial institutions, including small community banks and credit unions. These groups were forced to reduce the basic services they offered to customers as a result of dropping revenue.
Consequently, the prevalence of free checking accounts declined substantially. A Fed study found that as a result of capping debit interchange fees, banks are 35 percent less likely to offer consumers free checking. Unfortunately, popular debit card reward programs also declined significantly. The number of debit cardholders who earned rewards from their card purchases declined 30 percent after the Durbin Amendment was passed.
Durbin Amendment allowed retailers to pocket billions
While consumers and small businesses have suffered at the hands of price control standards set by the Durbin Amendment, big-box retailers have benefited enormously. According to a recent analysis using data from the Federal Reserve, big-box retailers are estimated to have pocketed over $90 billion since the Durbin Amendment was enacted in 2012. That astounding figure was calculated by multiplying the total number of debit transactions by the average per-transaction debit interchange fee and comparing that value to one in which interchange fees were held unchanged. The difference was over $90 billion, demonstrating the extent to which retailers have profited from the Durbin Amendment. Failing to keep their promise, an analysis be the Federal Reserve Bank of Richmond showed only 1 percent of merchants reduced prices in the wake of lower debit fee acceptance costs. Most (77 percent) did not adjust prices at all, and 22 percent actually raised them.
It’s hard to argue against the fact that the Durbin Amendment provided large retailers with a government handout. Still, retailer special interest groups continue to defend the policy despite more than a dozen studies showing the failures of the government price controls.
Payment industry’s contributions to consumers
Numerous financial institutions have been vocal about the Durbin Amendment’s failures for the last decade. While retailers have reaped the benefits of financial gains, these benefits have come at the cost of consumers, small businesses, and financial institutions. Interchange fees are vital to supporting the network of financial institutions involved in the electronic payments process. On average, retailers keep about 98 percent of every transaction, and the small interchange revenue that financial institutions do receive from retailers is combined with other income streams to support the electronic payments system. This includes investments in technology that all parties benefit from—such as fraud prevention, contactless payments, and Click to Pay technology.
It goes without question that any further increase in price controls would greatly diminish payment technology innovation, which only helps consumers and small businesses.
The 10-year anniversary of the Durbin Amendment is a reminder of its abject failure. As the state of our economy remains uncertain due to COVID-19, it’s time for Congress to repeal this amendment and finally put an end to a decade-long failed policy.
Jeff Tassey is chairman of the Electronic Payments Coalition.