Time to Repeal the Durbin Amendment

Time to Repeal the Durbin Amendment
AP Photo/Andrew Harnik

What if I told you Congress was about to pass an amendment that could raise food prices, make it harder to find and maintain a free checking account, and enrich big box retailers who, despite an ongoing $8 billion annual windfall, are rapidly eliminating American jobs? I suspect most readers would be outraged, calling their representatives or lining up at town halls.

Well that’s what they should be doing. But since Congress already enacted this bad idea, repeal is what consumers should be asking for. 

The time to make that request is now. Section 735 of the Financial CHOICE Act, which the House Financial Services Committee will consider Tuesday, will get rid of this provision, known as the Durbin amendment. This amendment set price controls on the fees that retailers pay for debit card purchases. It was included in the Dodd-Frank Wall Street reform bill, even though there was no hearing about the issue, which is totally unrelated to the financial crisis Dodd-Frank was meant to address.

According to a new paper by the International Center for Law and Economics (ICLE), the Durbin amendment has harmed low-income households and community financial institutions and will continue to do so if Congress doesn’t get rid of it. 

Merchants’ lobbying groups and Sen. Richard Durbin (D-IL), the provision’s sponsor, promised that retailers would cut consumer prices if Congress passed these price controls. A 2014 Federal Reserve Bank of Richmond study established that all but 1 percent of retailers either raised prices or kept them level after Durbin. According to the ICLE, grocery stores and fast food merchants were among those most likely to have increased prices. Price hikes on food, of course, hurt poorer households more than wealthier ones. The ICLE says consumers costs are also higher because Americans lost access to debit rewards programs because of the amendment. These losses “can effectively be characterized as a 1 percent increase in the cost of goods and services for consumers who use [debit] cards,” ICLE concludes. 

Based on data from the Federal Reserve, the Electronic Payments Coalition estimates that, instead of passing savings on to American households, retailers pocket about $8 billion a year. 

The Durbin amendment also has resulted in “a drastic reduction” in consumer access to free checking accounts, ICLE notes. These effects also are regressive in nature. In 2009, the year before Durbin passed, about three-quarters of Americans had access to free checking accounts. Today that number is around 40 percent. Low-income households feel these effects most acutely. Indeed, ICLE estimates that, overall, the Durbin amendment has cost lower-income consumers $1–3 billion per year. 

Durbin amendment supporters should have known this would happen. As ICLE explains, economists “universally agree” that price controls on payment card fees “will result in higher prices and lower services for card users.” History also could have been a helpful guide. According to ICLE, there’s no evidence that consumers in Australia or Spain paid lower prices after similar controls went into effect in those countries (in 2003 and 2005, respectively).

The Durbin amendment also pushed consumers to spend more than they would have otherwise. The reason, according to the Federal Reserve Richmond study, is that more merchants today require customers to spend a minimum amount for debit card purchases. Additionally, as the ICLE notes, the law pushed some consumers — especially those in low-income households — to use “more expensive and/or less convenient forms of payment,” such as money orders or cash. Neither effect is good for households on strict budgets.     

Small banks and credit unions predicted that the harm caused by the Durbin amendment would trickle down to them and their customers, despite the fact that they were exempt from the price controls. And it has. The ICLE paper points out that nearly three quarters of small banks surveyed by the Mercatus Center in 2014 suggested debit price controls eroded their earnings. The Credit Union National Association tallied losses from the Durbin amendment at $1.1 billion for credit unions annually, or 13 percent of total earnings. The ICLE notes small financial institutions were barely breaking even on their debit transactions prior to the amendment. Now the situation is even worse. 

Perhaps supporters of the Durbin amendment didn’t anticipate these effects six years ago. But today they are a reality for consumers. Congress must face that reality by repealing the Durbin amendment.  

Wilkinson is executive director of the Electronic Payments Coalition.

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