Extending the Durbin Amendment to the Credit-Card Market Will Harm Consumers

COMMENTARY Markets and Finance

Extending the Durbin Amendment to the Credit-Card Market Will Harm Consumers

Jul 14th, 2021 3 min read
COMMENTARY BY

Former Director, Center for Data Analysis

Norbert Michel studied and wrote about financial markets and monetary policy, including the reform of Fannie Mae and Freddie Mac.
Business owners—not federal bureaucrats—best understand what prices they need to charge to earn a living and to make their investments worthwhile. Karol Serewis /SOPA Images / LightRocket / Getty Images

Key Takeaways

In 2010, a Democratic-controlled Congress established price controls and new routing regulations on debit card transactions with the Durbin Amendment.

Business owners—not federal bureaucrats—best understand what prices they need to charge to earn a living and to make their investments worthwhile.

If Congress extends the Durbin amendment to the credit-card market, consumers are going to lose again.

In 2010, a Democratic-controlled Congress established price controls and new routing regulations on debit card transactions with the Durbin Amendment (Section 1075 of the Dodd-Frank Act). In 2017, a Republican-controlled Congress had the chance to repeal the Durbin Amendment, but it failed to do so.

Given that voters expect conservative members of Congress to protect them against government price controls, this failure was rather disturbing. Now it appears that Republicans are going even further: Rumor has it they’re working to help Democrats extend the Durbin Amendment to the credit-card market.

The Innovative Payments Association reports:

Sen. Dick Durbin (D-IL) is working on legislation that would apply similar limitations on credit interchange as the Durbin Amendment has applied to debit interchange. Specifics and timeline are unclear at this point, but indications are coming from the Hill that the legislation could focus on routing and potentially prohibit network exclusivity for credit routing. Sen. Durbin is also thought to be courting Sen. Kevin Cramer (R-ND) as a co-sponsor.

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Business owners—not federal bureaucrats—best understand what prices they need to charge to earn a living and to make their investments worthwhile. So, it is troubling that any conservative member of Congress would even entertain the idea of the federal government telling business owners what price they can charge and which suppliers they must use.

When one considers the damage the Durbin Amendment has already caused, and the rapidly changing landscape of the payments industry, this current effort is mindboggling.

For those that need it, here’s a quick refresher.

Back in the 1980s, when consumers started relying on plastic cards instead of checks to make their purchases, retailers started fighting with card network companies and the banks that issue the cards. Then, the problem centered on high credit-card transaction fees.

Years later, as debit cards started growing in popularity, retailers started lodging the same complaints for debit transactions. In both instances, they claimed that the card networks—mainly Visa and MasterCard—and large card-issuing banks were keeping fees artificially high. The only problem was that by the time debit transactions started taking off, the credit-card fee dispute was already bogged down in the courts.

In 2010, the Durbin Amendment required the Federal Reserve Board of Governors to cap the debit card interchange fees that large banks charge. It also required card networks to provide merchants with an option to route through at least one additional network.

In other words, the Durbin Amendment settled the debit-card dispute by taking the side of the retail trade associations against large banks and networks.

The Durbin Amendment was an end-run around the judicial process—Congress effectively settled the debit-card dispute by taking the side of the retail trade associations. Separate from the price-control issue, Congress should never have passed the Durbin Amendment because 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. The U.S. already had a long-established process to decide if illegal anti-competitive behavior truly was the source of a problem in these markets. Congress should have respected that process (not least of all because Congress created it).

Nonetheless, supporters portrayed the Durbin Amendment as pro-consumer. Supposedly, capping the debit-card interchange fees was going to save retail consumers billions.

This idea, of course, made little sense. Why would retailers engage in this costly fight to simply pass on the savings to their consumers? And why would banks that lost out on the fees simply let bygones be bygones, rather than try to make up the lost revenue somewhere else?

Unsurprisingly, early research suggests that banks have tried to recoup the losses, and that retailers did not lower their prices to pass on the savings to their customers.

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Back in 2017, retail trade associations fought the repeal of the Durbin Amendment, saying that repeal would be a win for big banks at the expense of consumers. The National Grocers Association argued that Durbin was an important reform “designed to encourage competition in an improperly functioning market.”

More power to anyone who wants to lobby for their cause, but the Durbin Amendment is a federal price control, and price controls do not encourage competition. Neither does requiring a company to offer a competitors’ services. Both types of government mandates discourage competition, thus harming consumers.

If Congress extends the Durbin amendment to the credit-card market, consumers are going to lose again. Banks will make up the cost however they can, whether by cutting back on rewards programs or charging new fees. And fewer companies will invest in new and improved networks because it will be more difficult to earn a profit, thus keeping the U.S. payments system technologically behind where it could be.

If Congress wants to help consumers by encouraging competition and innovation, it will repeal the Durbin Amendment, not extend its provisions to the credit-card market.

This piece originally appeared in Forbes https://www.forbes.com/sites/norbertmichel/2021/07/12/extending-the-durbin-amendment-to-the-credit-card-market-will-harm-consumers/?sh=75efd6b17632