After six years of unfulfilled promises, it’s time the Durbin amendment finally was repealed. A last-minute addition to the Dodd-Frank Act—itself a political overreaction to the financial crisis of 2007-2009—the amendment passed without a hearing or adequate discussion of how it would work in practice. We now know it hasn’t worked at all.
Interchange fees are charged by banks to retailers to allow customers to use that bank’s debit card in that store. The Durbin amendment gave the Federal Reserve power to cap those fees, which at the time averaged $0.44 per transaction, for banks with more than $10 billion in assets.
Proponents of the rule hoped that what would have been banks’ revenues would translate instead into lower retail prices for consumers. Indeed, retailers were projected to save an estimated $8 billion yearly. But nearly six years since the price controls went into effect, consumers have not benefited; a fair number, in fact, were made worse off.
The cost savings have, for the most part, become profits for retailers. The Federal Reserve Bank of Richmond found recently that three-quarters of retailers it surveyed did not change prices since interchange fee caps went into effect, and nearly one-quarter actually increased prices.
The Richmond Fed estimates the goal that retailers would pass savings on to customers in the form of lower prices has had an estimated 1.2 percent success rate. These findings are confirmed elsewhere, providing evidence to conclude that consumers experienced effectively no savings at the register.
For any student of history, it should come as no surprise that governments cannot divine the “fair prices” of things. Rent control laws in New York have created enough abandoned housing units to house all of the city’s homeless. Regulation Q, which allowed for government price fixing in deposits, encouraged complex arrangements that discriminated against smaller and less wealthy savers. One can go back as far as ancient Egypt and Babylon to find examples of people not understanding that prices convey economic realities that remain fixed, even after the government changes the prices.
That the Durbin Amendment would suffer the same fate as these other price controls was not hard to predict. To offset revenue losses and remain competitive, banks needed to find ways to raise their deposit account fees. Some did it through higher monthly service charges, while others cut back on free services like checking. A large number of financial institutions—especially small issuers like community banks and credit unions—essentially were pushed out of the competition due to the administrative costs and red tape of various provisions. And all financial institutions saw reduced incentives to innovate in the payment card industry.
As a result, financial markets suffered fewer free checking accounts, fewer debit-card rewards programs, higher costs of entry into financial services and continued reliance on payment networks more susceptible to fraud. These consequences hurt all bank customers, but especially those with lower incomes. Up to 1 million customers were pushed out of the banking system, presumably into the domain of alternative financial providers such as check-cashers and pawnshops.
From the observable consequences, one would be hard-pressed to find the amendment as accomplishing any legitimate objective, other than unintentionally enshrining benefits to particular kinds of retailers. The rule created market distortions that hurt all financial institutions, especially smaller ones, and hurt all depository customers, especially the poor. The Durbin amendment is a case study in how rushing into legislation—without give-and-take deliberation—tends to produce the opposite of what was intended.
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