Durban-Marshall & Reg II Benefit Big Retail at Customers’ Expense

Stop, thief! It’s common knowledge that looting and burglaries are often most successful when people are distracted by an attention-getting event – be it a sports championship or a natural disaster. In Washington, DC a presidential election counts, distracting attention in a way that inspires rent-seeking interests to use the regulatory state to shift benefits to themselves at the expense of everyone else.

Behold the current effort by the Big Retail lobby to get politicians and bureaucrats to do their bidding in the aftermath of the 2024 presidential election. While news like President-elect Trump’s cabinet picks dominate the media, big online and brick-and-mortar retailers are pushing to extend mandates similar to those enacted in the Durbin Amendment of 2010 that would shift even more of the costs of debit and credit card processing onto the backs of consumers. And they are finding receptive ears both in Congress and at the Federal Reserve.

On November 19, the Senate Judiciary Committee held a hearing to advance the Credit Card Competition Act, also known as Durbin-Marshall in reference to its sponsorship by Senate Majority Whip and Judiciary Committee Chairman Dick Durbin (D-IL) and Sen. Roger Marshall (R-KS). (Durbin also authored the original Durbin Amendment, part of the Dodd-Frank financial overhaul of 2010).

The Durbin-Marshall legislation attempts to force down credit card processing fees paid by retailers via government 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 proposed rule revising what it calls Regulation II, 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 by 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 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 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 Regulation II. That original rule under Regulation II 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 shifted most debit processing costs from retailers to consumers, sharply reducing consumer benefits such as free checking for low-balance bank and credit union accounts. 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.

This 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, and this means consumers would almost certainly be paying an even larger share of debit card processing costs.

Read more at Forbes