Where were you when the Durbin Amendment was snuck onto the Senate version of the Dodd-Frank Act in May 2010? Whether or not you remember exactly what you were doing when Sen. Dick Durbin of Illinois added an amendment to the Dodd-Frank Act to regulate interchange fees on debit card transactions, the painful reminder of this onerous piece of legislation remains.
The Durbin Amendment—while famous for its interchange fees on debit card transactions—also requires card issuers to (1) provide at least two unaffiliated payment card networks to process electronic debit transactions, preventing network exclusivity and (2) prohibits card issuers from inhibiting merchants from directing the routing of an electronic debit transaction over any network that may process that transaction.
And if Sen. Durbin and others have their way, we may soon feel a similar pain when it comes to credit card transactions. Lawmakers have recently shown interest in expanding the Durbin Amendment to affect credit card transactions, too, which would predictably result in a massive disruption to the U.S. payments ecosystem and prove detrimental to consumers.
Let’s be clear. This continuing, heavy-handed interchange regulation is nothing short of government intervention in free-market commerce that produces no measurable benefit for consumers. Supporters of the amendment claimed that consumers would see lower prices, but there is no evidence that has happened since the Durbin Amendment was passed.
Instead, it detracts from financial institutions’ ability to serve their customers. Credit unions will no longer be able to provide the best products and services to their members because they will need to save money at every turn to offset the lost interchange fee revenue not only on debit cards but possibly credit cards, too.
More Fees, Less Options
The amendment authorized the Federal Reserve to ensure that the amount of any interchange fee received by a large debit card issuer (with at least $10 billion in assets) is reasonable and proportional to the cost incurred by the issuer.
The provision was supposed to cut costs for customers and merchants by cutting the interchange fees charged by large banks roughly in half. While the amendment did in fact cut the average debit card interchange fee in half—primarily benefiting larger retailers—financial institutions were forced to recoup losses by eliminating free checking, raising minimum balance requirements, and charging higher maintenance fees.
The following 79-page 2019 scholarly article from University of Pennsylvania Carey Law School examines the impact of the Durbin Amendment on banks (the study sampled bank holding companies with more than $500 million in assets), retailers, and consumers. The empirical analysis used various sources of data to provide causal evidence that banks whose interchange revenue decreased post-amendment responded by increasing fees. The evidence that the interchange cap successfully drove down banks’ interchange revenue, causing them to offset losses by raising other account fees is fascinating: the share of free basic checking accounts went from 60 percent to 20 percent post-Durbin; and average checking account fees increased to a monthly rate of $7.44 per month from $4.34.
The evidence confirms what we already knew: The Durbin Amendment overall has brought no benefit to consumers. Extending the amendment to credit card transactions will erode the U.S. payments ecosystem and stifle small business growth at a time when consumers and the entire economy are recovering from the devastation of the pandemic.
Additionally, an expansion of the Durbin Amendment would disrupt financial institutions’ operations. Because card-not-present (CNP) transactions were not considered when FIs signed the contracts for additional CNP networks in 2010, an expansion of the amendment would likely require financial institutions to sign contracts with at least one additional routing network to comply with the exclusivity prohibition. Adding routing networks makes financial institutions less efficient and large retailers are pushing hard to clarify regulation language, which we vehemently oppose.
What’s more, multiple networks vying to become the low-cost network for merchants will likely create a race to the bottom for the interchange fees paid to card-issuer financial institutions. While merchants may argue that’s the point of interchange fee caps, financial institutions still need to be compensated for the cost of sustaining payment card programs. And that cost is rising.
One of the largest such costs is fraud, which is largely borne by the card-issuing financial institutions. In fact, debit card fraud is significantly higher for online transactions because, without a card reader, a card’s EMV chip offers no additional protection.
If the race to the bottom described above comes about, the margin on CNP transactions will be even narrower for financial institutions.
In late July, financial trade organizations from the banking and credit union worlds came together to sign a letter to lawmakers fiercely opposing Durbin Amendment expansion. The letter stated that expanding the cap on interchange fees from debit cards to credit cards “would undermine the overall health and security of the U.S. payments ecosystem.” It also stated that expanding the amendment would have “significant negative implications for consumers and small businesses at a time when the U.S. economy is just starting to recover from a global pandemic.”
In addition, we at Cornerstone are energizing our political advocacy efforts to make sure that Congress hears the voice of our members. We urge all in the banking industry—specifically the credit union movement—to do so. The time to act is now, before the damage of the Durbin Amendment has a chance to expand.