Repeal The Durbin Amendment: Restore The Rule Of Law

COMMENTARY Monetary Policy

Repeal The Durbin Amendment: Restore The Rule Of Law

Jan 10th, 2017 3 min read
COMMENTARY BY
Norbert J. Michel, Ph.D.

Director, Center for Data Analysis

Norbert Michel studies and writes about financial markets and monetary policy, including the reform of Fannie Mae and Freddie Mac.
The Durbin Amendment settled the debit-card dispute by taking the side of the retail trade associations against large banks. iStock

Key Takeaways

Congress should never have passed the Durbin Amendment.

The Durbin Amendment settled the debit-card dispute by taking the side of the retail trade associations against large banks.

The core provisions of U.S. federal anti-trust law are found in the 1890 Sherman Act and the 1914 Clayton Act.

Consumers started relying on plastic cards instead of checks to make their purchases back in the 1980s. Almost immediately, retailers started fighting with card network companies and the banks that issue cards. The problem centered on high credit card fees.

Retailers charged that the card networks – mainly Visa and MasterCard – were conspiring with the large card-issuing banks to keep fees high. The networks and the banks countered that retailers were free to contract with others if they thought the fees were too high, but if they wanted access to the largest customer base, they’d have to pay their fees.

Fortunately for all sides, Congress long ago established the framework for anti-trust law to deal with exactly these types of disputes. Using excessive market power and colluding to fix prices are very serious charges that demand objective fact-finding.  So it’s good that these disputes are regularly settled in federal court.

Sometimes the process drags on, and invariably one side loses, but the upside of the U.S. approach is that it provides – beforehand – a transparent legal framework and dispute resolution process.

But one particular dispute over credit card fees has dragged on for more than a decade. And it’s still not over because a federal appeals court recently threw out a $7.25 billion settlement in the retailers’ class action lawsuit. (A similar lawsuit was settled in 2003, and the card networks lost). As luck would have it, the industry started changing just about the time the credit-card litigation got under way, and debit cards started to become all the rage.

Debit card transactions surpassed credit card transactions for the first time more than a decade ago, and they’ve pretty much stayed in the lead.  According to the Federal Reserve, the “number of debit card payments increased more than any other payment type from 2009 through 2012.”

During this shift, retailers lodged the same sorts of complaints regarding debit-card fees, so it wouldn’t be too strange to see this battle end up in court too.  In fact, there’s an excellent chance the retailers would already be in court over debit-card interchange fees if not for something called the Durbin Amendment.

The Durbin Amendment – Section 1075 of the Dodd–Frank Wall Street Reform and Consumer Protection Act – required the Federal Reserve Board of Governors to cap the debit card interchange fees that large banks charge.  In other words, the Durbin Amendment settled the debit-card dispute by taking the side of the retail trade associations against large banks.

Congress should never have passed the Durbin Amendment. The legislative body is not designed to adjudicate legal disputes. Of the three branches of the U.S. government, the judicial branch – not Congress – was set up for exactly this purpose.

Congress’s job is to write the laws.  In this area, it did its duty a long time ago—by writing the nation’s anti-trust laws.

The core provisions of U.S. federal anti-trust law are found in the 1890 Sherman Act and the 1914 Clayton Act.  These laws provide the legal framework for resolving anticompetitive price fixing disputes, and they’re the very same laws that are currently guiding the resolution of the credit-card fee litigation.

Retailers may not be happy with litigating their case for a decade, but there is absolutely no reason that the federal courts cannot adjudicate the same type of dispute over debit-card interchange fees.  And that’s exactly where the dispute belongs.

You can find the original commentary published on Forbes here

This piece originally appeared in Forbes