For the Sake of Consumers, Kill the Durbin Amendment
Passed in 2010 as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the Durbin Amendment empowered the federal reserve to cap interchange fees at a “reasonable and proportional to the cost incurred by the issuer with respect to the transaction.” Senator Durbin (D-IL) believed that by capping interchange fees, small businesses would face lower costs, which could be passed onto consumers.
Despite Senator Durbin’s beliefs, his amendment has not lowered costs for consumers. Instead, the Durbin amendment has diminished consumer welfare and fundamentally changed the debit card transaction ecosystem. Unfortunately, there are new efforts that seek to expand the scope of the Durbin amendment to cover online debit and credit card transactions. For consumers, this would be a step in the wrong direction.
Shortly after the passage of Dodd-Frank, the Federal Reserve determined that this rate should be $0.21 plus five percent of the transaction fee. Previously, interchange fees averaged about $0.44 per transaction. Interchange fees, more commonly known as swipe fees, are transaction fees that a business “must pay whenever a customer uses a credit/debit card to purchase from their store.” These fees are intended to cover “handling costs, fraud, and bad debt costs and the risk involved in approving the payment” and have become an essential part of the financial ecosystem. According to Senator Durbin, small businesses “paid out a staggering $62.5 billion in swipe fees” to Visa and Mastercard in 2020 alone.
Despite trying to cut costs for consumers and businesses, research has consistently shown the Durbin amendment denied consumers access to no-fee and low-fee financial services. Moreover, this denial disproportionately harmed minority and low-income communities, preventing them from accessing formal lines of credit.
Specifically, after the Durbin Amendment became law, “the total number of banks offering free current accounts fell by 50% between 2009 and 2013,” and banks began introducing additional fees such as maintenance, ATM, and overdraft fees.
In 2020 alone, it has been estimated that Americans paid over $303 billion in everyday financial services, with over $250 billion spent by low-income or financially vulnerable Americans. Overdraft fees alone cost Americans $12.4 billion. Most of these fees were introduced by banks to make up for lost revenue associated with a cap placed on interchange fees.
If interchange fees are capped on credit card transactions, credit card issuers will probably begin issuing ancillary charges for their use, removing no-fee credit cards, or increasing the annual fees to make up for the lost revenue. These new costs will disproportionately harm lower-income Americans as they will be less able to afford to keep or access credit cards.
Aside from making it harder for Americans to access credit cards, capping interchange fees could also have wider implications for cybersecurity. Credit card fraud is a growing problem for consumers, with Americans losing $11 billion each year to criminals obtaining sensitive financial information. In 2019 alone, “almost 165 million [financial] records containing personal data were exposed through data breaches.”
In response to the growing threat posed by cybercriminals, credit card issuers have announced they are investing billions of dollars into enhancing their cybersecurity protections. Last year, Mastercard announced a $510 million investment in a new Cyber Centre to secure the 4 billion transactions it processes each year. Since 2011, American Express has invested “in over 70 start-ups focused on commerce, payments, fraud prevention, data analytics, and security.” These investments have allowed American Express to create programs and analytical tools that enable it to “monitor in real-time and generate a fraud decision in milliseconds every single time an American Express card is used around the world.”
Capping interchange fees for credit card transactions would ultimately deny issuers the ability to make these sizable investments that protect consumers from the growing threat of cybercrime and financial fraud.
Looking at the consequences of the Durbin amendment, it should be readily apparent that expanding its scope to cover credit card transactions is a step in the wrong direction for American consumers. Not only would it deny them access to no and low-fee credit cards, but it could also prevent important investments from being made in protecting sensitive financial information. Without these investments, consumers will be placed at unnecessary risk of falling victim to identity theft and financial fraud.
Rather than expanding the scope of the Durbin amendment, it’s probably time for Congress to ditch the provision entirely.
Edward Longe is a Policy Manager at the American Consumer Institute, a nonprofit educational and research organization. For more information about the Institute, visit www.TheAmericanConsumer.org or follow us on Twitter @ConsumerPal.