Hey Fed! Don’t worsen devastating Durbin debit card price controls

Consumers using their debit and credit cards just can’t catch a break these days from politicians, bureaucrats, and big retailers pushing Big Government ripoffs.

In Congress, the big box stores are lobbying for the so-called Credit Card Competition Act, also known as Durbin-Marshall for its Senate sponsors, that attempts force down credit card processing fees paid by retailers with mandates that would devastate the credit card rewards programs many consumers utilize. See CEI’s video about this proposed ripoff here. My CEI colleague Iain Murray has also written about knock on-effects the bill would have on the airline industry, likely hiking airline fees. 

Meanwhile, in a policy action that has received considerably less coverage, the Federal Reserve is unilaterally moving to force down the debit card price controls from the original Durbin Amendment that have already greatly harmed the financial wellbeing of lower- and middle-income consumers. The new proposed rule would slash the price controls almost a third, compromising quality and data security and shifting even more of the costs of debit card processing from retailers – including giant retail chains like Walmart and Target – to already struggling consumers.

As my CEI colleagues and I have argued with proposed rent controls from the Biden-Harris administration and grocery-store price control mechanisms proposed by Kamala Harris’s campaign, price controls have failed everywhere they have been tried and result in shortages and lower-quality goods and services.

And almost nowhere has this failure been more spectacular and more harmful to the lower income consumers price control advocates claim to help than with the Fed’s original implantation of the Durbin Amendment. Passed as part of the 2010 Dodd-Frank financial “reform” legislation that had many disastrous provisions, the measure mandates that interchange fees charged by debit card issuers to retailers to process debit card transactions be “reasonable and proportional to the cost incurred by the issuer with respect to the transaction.” The law required the Fed to write regulations to implement this provision, which the Fed did in 2011 through a rule called Regulation II. That rule set the price cap at its current level of 21 cents per transaction.

While the 21-cent level of price controls was not as draconian as the 12-cent level the retailer beneficiaries pushed for, it still had devastating effects as it shifted most debit processing costs from retailers to consumers. As I point out in recent comments to the Fed opposing the new proposed rule:

Even at the 21-cent level set in 2011, the Fed’s implementation resulted in banks sharply reducing free checking for low balance accounts and in debit card rewards virtually disappearing, as the bulk of the costs of processing debit cards shifted from retailers to consumers. And academic studies showed that little if any of the retailers’ savings from the price controls were passed on to consumers.

The devastation the Durbin price controls have already caused to consumers makes it all the more shocking that the Fed would even consider making the price controls any lower. Yet in the new rule to revise Regulation II, the Fed proposes to lower the price cap to just 14.4 cents per transaction. As I point out in the comments:

The rate of inflation shows how inappropriate the new price cap of 14.4 cents is. It is lower in inflation-adjusted dollars than the lowest rate of price cap of 12 cents per transaction the Fed was considering when it initially set the price cap in 2011. A CPI calculation shows that 12 cents in 2011 has the value of 16.24 cents today. So the 14.4 cent price cap is the lowest the Fed has ever considered.

In the comments, I call this worsening of the Durbin price controls an “arbitrary and capricious action” that goes “beyond what the law requires.” Urging the Fed to withdraw the rule, I conclude:

American consumers face many headwinds today with high gas and food prices and inflation. They should not be punished with a rule that will likely result in higher bank and credit union fees and more costly financial services.

Former CEI Research Associate Ari Patinkin contributed to this post.