There is No Consumer – or Small Business – Case for the Durbin Amendment

Congress will soon consider the Financial CHOICE Act (FCA), the comprehensive bill aimed at correcting the mistakes of the Dodd-Frank Act and earlier financial laws such as Sarbanes-Oxley. Among those mistakes was the “Durbin Amendment,” which imposed a price cap on the fees banks can charge merchants when customers use the bank’s debit cards to buy goods or services from the merchant. Despite literally thousands of years of evidence that price caps don’t work, big merchants and their allies are lobbying hard to get repeal of the Durbin Amendment out of the FCA. Two important new pieces of research underline why it should stay in.

The first is an update of a 2014 paper for the International Center for Law and Economics by Todd Zywicki, Geoffrey Manne, and Julian Morris that demolishes the claim that the Durbin Amendment would be good for the consumer as their costs would be lowered. Its findings are:

• The evidence presented in this paper contradicts the claim that the costs resulting from the Durbin Amendment have been offset by merchants charging lower prices. Indeed, the majority of consumers – and especially those with lower incomes – have experienced higher prices overall.
• Millions of households, regardless of income level, have been adversely affected by the Durbin Amendment through higher costs for bank accounts and related services. Most troublingly, this has hit lower-income households the hardest. Hundreds of thousands of low-income households have chosen (or been forced) to exit the banking system, with the result that they face higher costs, difficulty obtaining credit, and complications receiving and making payments.
• That a forced reduction in interchange fees would result in higher bank fees for consumers is a matter of basic economics. Retail banking in the United States is a highly competitive industry and there is no evidence of supra-normal profitability for retail banks. As such and over time, cost increases or revenue reductions will be passed on to bank customers in the form of higher bank fees or reduced services. It was simply inevitable that the removal of billions of dollars in interchange fee revenue would ultimately result in higher costs for bank consumers.
• For some higher-income households the costs are likely mitigated by their ability to avoid checking account fees and to switch to credit cards. For both lower-income and higher-income households these costs may have been further offset, to some extent, by slightly lower prices at some merchants. But for lower-income households in particular, these possible offsets are either inaccessible or too small to make much difference. For them the Durbin Amendment has, on net, unequivocally imposed more costs than benefits.
• The Durbin Amendment has also served to increase costs for some smaller retailers and sellers of small-ticket items. Among those most adversely affected have been grocery stores, fast food outlets and similar establishments, a significant proportion of which have raised prices since the Amendment was implemented. Again, these effects hit low-income households the hardest.

The second piece of research backs up that final point. Building on previous research the consultancy had performed for the Federal Reserve Bank of Richmond, Javelin Strategy surveyed 500 small merchants (with annual sales between $250,000 and $10,000,000) and found that price caps were less important to those merchants than flexibility and choice.

Among the findings were:

• Merchants prefer customers to use credit cards rather than debit cards despite the higher interchange rates for credit cards
• Only 11 percent of merchants were dissatisfied with how much they paid in interchange rates
• Over 80 percent of merchants were satisfied with the transparency and value from their payment processors
• Only about three percent of merchants believed interchange rates hurts their profitability
• Merchants who understood more about the interchange fee mechanisms were more likely to choose comprehensive, higher-priced rate packages
• Most merchants did not know about the Durbin Amendment and other efforts to cap prices
• Most of the merchants surveyed were not members of trade groups that have lobbied for interchange price caps

Taken together, these studies demonstrate that there is no consumer case for keeping the Durbin Amendment, and neither is there a small business case for doing so. The prime beneficiaries of Durbin were and remain the big retailers, who use consumers and small merchants as the pretext for demanding price caps that swell their bottom line.