In February, the White House issued a set of “Core Principles” for financial services reform that requires agencies to “empower Americans to make independent financial decisions and informed choices in the marketplace.” A good place to start would be for Congress to repeal the so-called Durbin Amendment of the Dodd-Frank Act.
Seven years ago, Democratic Illinois Sen. Richard Durbin rammed through an eleventh hour amendment to Dodd-Frank that imposed price controls on the permissible rate that large banks can charge for debit card interchange fees (the service fee paid by a merchant to the bank that issues the consumer’s card).
{mosads}Congress passed the Amendment on Durbin’s assurance that it would “help every single Main Street business… keep more of their money, which is a savings they can pass on to their consumers.” Unfortunately, neither small retailers nor consumers have actually benefitted much — and in many cases they have been made much worse off. Meanwhile big box retailers and their shareholders have pocketed over $40 billion in cost savings so far.
The reason for this outcome is as simple as it was predictable. Retail banking is a competitive, two-sided market, which means that card issuing banks that lose revenue from merchants on one side of the market must make up the loss by increasing revenue or lowering costs on the consumer side.
As we show in a new report published by the International Center for Law & Economics, banks have responded to these lost interchange-fee revenues of $8 billion per year in a number of predictable ways: They have raised overdraft, ATM and other fees; they have curtailed access to free checking and doubled the monthly fees on non-free accounts; they have increased the mandatory minimum balance necessary to qualify for free checking six-fold (from an average of $109 in 2008 to $670 last year); and they have curtailed rewards on debit cards (by 30 percent in the first year after the amendment’s passage alone).
While wealthy consumers have substantially avoided these adverse consequences by meeting higher monthly balance requirements or shifting their purchases to credit cards (which continue to offer rewards), lower-income and younger consumers who can’t meet the new requirements are paying hundreds of dollars per year in bank fees, just to have a checking account.
Overall, according to a study by the Boston Federal Reserve, banks have recouped roughly 30 percent of their lost interchange fee revenue by charging consumers higher fees. But even that doesn’t fully account for the harm the Durbin Amendment has imposed on consumers. Many lower-income households have been forced by these higher costs to abandon bank accounts entirely, turning instead to check cashers, pawnbrokers, money orders, prepaid cards, and other, frequently more-expensive, financial services.
All told, we estimate that the Durbin Amendment has resulted in lower-income consumers paying approximately $1-3 billion per year in additional out-of-pocket costs, not including the loss of rewards.
Still, this could conceivably be an acceptable trade-off if it were accompanied by even larger retail price reductions, as promised. But that hasn’t been the case.
A recent study conducted by the Richmond Federal Reserve found that the overwhelming majority of merchants have not changed prices at all in response to the Durbin Amendment’s price controls. In fact, only about 1 percent of merchants reported that they had reduced their prices in response to the Amendment, while over 20 percent actually raised them. At the same time, by causing the near-extinction of debit card “cash-back” rewards (typically of 1 percent of purchases), the Durbin Amendment has effectively imposed an across-the-board 1 percent price increase on consumers who formerly received this benefit.
And merchants haven’t really fared much better. Interchange fees for many small transactions have actually gone up since the Amendment’s passage. According to the Richmond Fed’s survey, while 11 percent of merchants reported reduced interchange costs, three times as many reported increased costs. Most notably, the study found that costs rose for 66 percent of fast food restaurants and 54 percent of grocery stores — an outcome not likely to benefit poorer consumers, in particular.
In short, the Durbin Amendment has harmed consumers — especially lower-income consumers — and small businesses, while providing little benefit to any but the largest retailers. Moreover, the regulation appears to be adversely affecting community banks and credit unions, as well, even though they were supposed to be exempt from the Amendment and can little afford the loss of revenue.
Now, almost six years since implementation of the Durbin Amendment’s regulations, Congress is finally taking a serious look at the law’s damaging effects. In fact, the latest discussion draft of Rep. Jeb Hensarling’s CHOICE Act includes a provision that would repeal the Durbin Amendment in its entirety.
Feel-good rhetoric (and disingenuous politicking) aside, the Amendment has failed to deliver on any of Sen. Durbin’s promises to consumers and small businesses. If Congress truly wants to help consumers, it will repeal it.
Geoffrey Manne is executive director of the International Center for Law & Economics in Portland, Oregon. Todd J. Zywicki is a professor of law at the Antonin Scalia Law School at George Mason University. Julian Morris is the vice president of research at the Reason Foundation.
The views expressed by contributors are their own and are not the views of The Hill.