The Durbin amendment is a disaster for banks — don’t expand it to credit cards

Sen. Dick Durbin’s (D-Ill.) eponymous amendment to the Dodd-Frank Wall Street Reform and Consumer Protection Act is the epitome of unnecessary federal overreach. Now, some lawmakers are discussing the expansion of the Durbin amendment to credit cards.

The continuation of this bad policy is one thing, but the expansion of it to credit cards will only further restrict lending for small businesses and individuals and eliminate credit card rewards and promotions, thus narrowing choices for consumers. It is nonsensical to expand a policy that has not worked since its inception.

The Durbin amendment, as it is known, artificially capped fees that certain banks and credit unions receive with debit card transactions. These fees cover expenses for handling transactions and losses in the case of fraudulent activity.

The Durbin amendment and the subsequent Federal Reserve rule that implemented its mandates is nothing more than a distortive price control. Like all price controls, the Durbin amendment harms every party involved except for the party it is meant to benefit — in this case, multibillion dollar retail giants. What is rarely discussed, however, are the adverse effects of this price control on the greater economy. Consumers, banks, credit unions and everyone that is not a large retail corporation loses under the Durbin amendment.

The goal of the amendment was to lower debit card processing costs for retailers so they would lower prices on consumers. In reality, across many sectors of the economy, most retailers either maintained prices or raised prices on consumers following the implementation of the Durbin amendment. As a result of the implementation of the fee cap, very few, only about 1 percent, of retailers actually reduced prices for consumers. Astonishingly, about 22 percent of retailers raised prices on consumers. 

To say that consumers benefited from the Durbin amendment is just plain false. 

As was intended by the fee cap, banks and credit unions issuing debit cards have lost billions of dollars in revenue due to this burdensome federal regulation. According to a study conducted by professors from Georgetown University and the University of Pennsylvania, interchange revenue for banks covered by the rate cap was reduced by 25 percent — a $6.5 billion annualized reduction in revenue. 

Because of this drastic reduction in revenue, depository institutions have to make up for lost revenue by eliminating other free or low-cost products for consumers. The aforementioned study points out that the higher fees on bank checking accounts “are disproportionately borne by low-income consumers.” For example, since the implementation of the Durbin amendment, banks have eliminated debit card rewards and discounts on fees. A 2012 study conducted by Pulse found that 50 percent of debit card issuers regulated by the rate cap ended their rewards programs in 2011. Additionally, another study by the Federal Reserve found that the fee cap made banks 35 percent less likely to offer free checking accounts.

Although the Durbin amendment was supposed to have no effect on banks and credit unions with less than $10 billion in assets, this is simply not the case. In fact, the fee cap is harming small community banks and credit unions. Data from the Federal Reserve clearly shows that community banks and credit unions have lost interchange fee revenue since the implementation of the fee cap. Small community banks have seen interchange fees decline by over 20 percent from 2011 to 2019. 

In fact, 99 percent of all banks in the United States are community banks. For supervisory purposes, the Federal Reserve defines community banks as depository institutions with less than $10 billion in assets. While that might seem like a gargantuan amount of money, compare that with J.P. Morgan Chase, which has over $3 trillion in assets.

Lost revenue translates into cutting costs elsewhere, which means taking less risk. This often comes in the form of offering fewer loans and therefore reducing access to capital. This capital is extremely vital for small businesses that are reliant on community bank financing. Community banks provide more than 60 percent of all small business loans in the United States. Unfortunately, the pandemic has been disastrous for small businesses in the United States. If the price controls of the Durbin amendment had not been in place, perhaps more capital could have been offered to support small businesses through the horrors of 2020. 

Credit unions also lose under the Durbin amendment. According to a 2017 report published by the Credit Union National Association, credit unions lost more than $6.1 billion because of burdensome fee caps. Just like community banks, this is an effective method for eliminating all lines of credit and ensuring that small businesses have no way to sustain themselves, especially through pandemics and economic downturns. 

Congress should focus on promoting competition in the payments system by eliminating regulations, not creating more. Free market enterprise is the best way to engender competition, lower prices, lower costs, and expand consumer choice. The sustainment and expansion of the Durbin amendment will accomplish none of that. 

Bryan Bashur is a Federal Affairs Manager at Americans for Tax Reform and executive director of the Shareholder Advocacy Forum.