Data Tells the Truth About the Durbin Amendment
For years the payments industry has been at odds with big-box retail lobbyists over the Durbin amendment — an amendment to the Dodd-Frank bill by Sen. Richard Durbin (D-IL) that sets price controls on debit interchange fees. Why is this debate resurfacing again now? Because after six years, American consumers are waking up and realizing they have been cheated, that the policy is a failure.
Community banks, credit unions, and other financial institutions recognized right away that the Durbin amendment’s price controls would pose a serious problem. But a few members of Congress have taken a bit longer to come around, in part because the technical description of the law makes a good story for merchants. Big-box retailers also have a track record of leaving out key data and speaking for community banks and credit unions — those actually impacted by this harmful regulation.
For example, big-box retailers and their lobbyists like to tell half the story when discussing how interchange fees — which are part of debit-card fees — have changed since 2008. Their side says that banks and credit unions (the issuers of debit cards), are experiencing increased revenue from interchange since the amendment passed.
However, a comprehensive look at the data shows that recent increase in total interchange fees is driven by an overall expansion in the use of credit and debit cards. For instance, data from Euromonitor International show the share of credit and debit card purchases increased by nearly $1.2 trillion, now representing 46 percent of total consumption value, up from 37 percent in 2008.
Moreover, the number of debit and credit card transactions increased by nearly 31.7 billion over the same period. Naturally, interchange revenue would rise given such a sharp increase in consumers’ use of electronic payments.
The story doesn’t stop there. Interchange fees have actually fallen when taking into account the variation in interchange fee per transaction over the same timeframe.
According to data from the U.S. Federal Reserve, government-imposed price controls implemented in 2011 resulted in a 30 to 60 percent decline in the average interchange fee charged by large issuers, depending on the network used to authorize the transaction. Meanwhile, fees charged by small issuers declined by 4 to 18 percent during the same period — despite these smaller issuers being supposedly “exempt” from the price controls.
This scheme translates into an annual 6 to 8 billion dollar handout for retailers at the expense of community banks and credit unions, effectively diminishing customer services and benefits such as free checking accounts and debit rewards programs. Financial institutions use revenue from interchange fees to support the complicated global payments network and make important investments in security technologies. One study estimates that the reduced revenue for credit unions from the Durbin amendment totals a whopping $1.1 billion. That’s a large chunk of money to take away from the credit union member-owners who make up one third of all Americans.
Big-box retailers argue that they pass these savings on to consumers, but the evidence suggests otherwise. A 2014 Federal Reserve study concluded that just 1 percent of retailers are actually doing so. That means that by the end of 2016, roughly $42 billion (and growing) is now lining the pockets of big-box retailers thanks to the Durbin amendment.
New data released by Morning Consult shows consumers are waking up to this grim reality. Over six in 10 consumers think the Durbin Amendment should be repealed if merchants are not passing the savings on to customers. Furthermore, consumers are increasingly skeptical of the government’s involvement: By a two to one margin, respondents think more regulation will stifle innovation of electronic payments. Along the same lines and by a similar two to one margin, consumers think interchange fees should be negotiated by merchants and processors, instead of being determined by the federal government. It is clear that changes need to be made.
This story could have a happy ending. Solutions are on the table to repeal a failed policy that has lasted six years too long. With all the facts at hand, lawmakers should move swiftly to reverse these price controls, which have harmed consumers, small businesses, community banks, credit unions, and other financial institutions. It’s time to repeal the Durbin amendment.
Molly Wilkinson is executive director of the Electronic Payments Coalition (EPC). EPC includes credit unions, banks, and payment card networks that move electronic payments quickly and securely between millions of merchants and millions of consumers across the globe. EPC’s goal is to protect the value, innovation, convenience and competition in today’s growing electronic payments system.