Today, the Supreme Court lifted a cloud of uncertainty that had been hanging over consumers, community banks, and credit unions by refusing to take a case that threatened to make the stifling Dodd-Frank pseudo-financial reform legislation even more draconian than it already is.
The Court let stand a unanimous ruling from a three-judge D.C. Circuit Court of Appeals panel that overturned district Judge Richard Leon’s 2013 ruling that the Federal Reserve had not made the price controls stemming from Dodd-Frank’s Durbin Amendment were not stringent enough. Today’s decision, authored by Clinton-appointed Judge David Tatel, found that the Federal Reserve “reasonably construct[ed]” the law in considering costs in setting the price caps.
In the wake of cybersecurity attacks on credit and debit cards, this ruling may have come in the nick of time. In a show of incredible chutzpah, the trade associations for some of the nation’s largest retailers argued in federal court—even after the Target breach—that retailers should pay even less for fraud prevention and cleanup after fraud losses than they currently are under a federally imposed limit.
That would mean that innovation would continue to lag behind and even more of the costs of payment processing would be shifted to consumers—as they have since the passage of this amendment, which was inserted into the 2010 Dodd-Frank financial overhaul by Senate Majority Whip Dick Durbin (D-Ill.).
An affirmation of the Durbin Amendment from the Supreme Court could have boosted a pending attempt by the European Union to implement Durbin-style price controls on debit and credit cards. (The Competitive Enterprise Institute and nine other international free-market groups recently formed the International Alliance for Electronic Payments to persuade EU governments and others to spare consumers this costly and regressive regulatory burden.)
Dodd-Frank’s Durbin Amendment—the result of heavy lobbying by Target, Walmart, and other large retailers—states that the debit interchange fees charged to retailers must be “reasonable and proportional to the cost incurred by the issuer [bank or credit union issuing the card] with respect to the transaction.” This imposed price controls on the interchange fees—also known as “swipe fees”—that banks and credit unions charge merchants for debit card transactions. CEI opposed the Durbin Amendment from the start, because price controls undermine individual property rights and are impractical anyway.
Many lawmakers who voted for the Durbin Amendment believed that its price-setting process would function similarly to rate regulation of electricity and phone service, in that the fee set would allow for infrastructure and service costs plus what is judged as a “reasonable rate of return.”
What happened instead was that Fed rules implementing the provision bar issuing banks and credit unions from profiting on the fees charged to retailers, and therefore issuers could recover only a very limited portion of costs through such fees. That in turn, has held back promising innovations in payment technology, including Bitcoin and similar digital currency, as the Durbin price controls have killed the profit motive necessary to get these innovations into the hands of everyday retailers and consumers.
This has resulted in a massive cost-shifting of debit card processing costs from retailers to consumers, a sharp reduction of free checking for low-balance accounts, the virtual end of debit card rewards, and fewer resources from retailers to financial institutions to fight hacking and cyberattacks. As I explain here, banks and credit unions pay for the vast bulk of the damage from data breaches, even when caused by retailer error.
In a June 2014 study, George Mason University law professor (and CEI Chairman) Todd Zywicki, International Center for Law and Economics Executive Director Geoffrey J. Manne, and Reason Foundation Vice President Julian Morris found that the Durbin Amendment led to an additional 1 million Americans, “mainly among low-income families,” joining the nation’s unbanked population.
Had the retailers prevailed in this lawsuit—arguing in part the fees still allow banks and credit unions to recover too many data security costs—consumer costs would have risen even further and card purchases would likely have become even more vulnerable to attacks.
In the appeals court ruling, Judge Tatel made similar points to ones I have made in OpenMarket and the Credit Union Times on the flaws in Judge Leon’s decision. Yes, the Durbin Amendment is “convoluted”—in Judge Tatel’s words—but the fact that its language did not explicitly bar “fixed costs” means the Fed is within its authority to consider those costs in setting the price controls.
So, while the Court refrained from making the Durbin Amendment worse, the amendment still has meant the virtual end of free checking and is stalling needed innovation to fight security breaches.
Congress should repeal this convoluted and draconian measure, along with many other destructive provisions of Dodd-Frank. Moreover, the EU should heed the Supreme Court’s common sense and not go down Dick Durbin’s dangerous road of interchange price controls for debit or credit cards.