Durbin Doubles Down on Dubious Debit Decree

The Dodd-Frank Act’s so-called “Durbin amendment,” passed more than a decade ago in 2010, was supposed to reduce the cost of consumer goods by regulating the price and processing of debit-card transactions. 

In practice, it has instead harmed consumers. Banks offset the income they lost from debit-card fees by increasing fees on checking accounts, increasing the minimum deposit required for “free” checking, and eliminating debit rewards programs. Meanwhile, merchants passed on little of the savings they enjoyed.

But that hasn’t stopped Sen. Richard Durbin (D-Ill.) — author of the original provision — from doubling down, introducing a bill that would impose similar regulations on credit cards. The results are predictable.

The original Durbin amendment did two things. First, it imposed a blunt price ceiling on the interchange fees that large issuing banks could charge on debit cards. Second, it required all issuing banks to include more than one payment network on their debit cards to “route” debit transactions. While the price-control provision has gained the lion’s share of attention, the second element has proven problematic as well, especially for smaller community banks and credit unions. 

The premise of these interventions was to artificially reduce the interchange fees that card issuers indirectly charge merchants to process transactions. In turn, lower interchange fees supposedly would be passed on to consumers in the form of lower prices. By capping fees and introducing “competition” to routing, the Durbin amendment was intended to save merchants money, which would be passed on to consumers.

As noted, that’s not what happened. Multiple empirical studies have shown that merchants pocketed most of their cost savings, rather than passing them on to consumers. The result was that many poorer consumers ended up paying much higher bank fees, while receiving little in return.

The Durbin amendment’s routing requirement had a similar effect on PIN-debit revenue at smaller banks. The operators of unaffiliated PIN networks, who were not bound by the default interchange fees set by agreement between issuing banks and the main national payment-card networks (Visa and Mastercard), saw a profit opportunity. They knew that they could win business by offering lower interchange fees. Thus, despite Sen. Durbin’s assurances that he was only soaking the big banks and leaving smaller banks unscathed, smaller banks and credit unions were forced to accept lower PIN-debit fees, which fell from an average of $0.32 in 2010 to $0.22 in 2019 (in constant-dollar terms), just one cent more than the price-controlled fees for covered banks.

The senator’s recently introduced Credit Card Competition Act of 2022 would expand the original Durbin amendment by requiring all credit-card-issuing banks with assets of more than $100 billion to include at least two networks on their credit cards. Moreover, the bill specifically singles out Visa and MasterCard for discriminatory treatment, by providing that only one of these two largest networks can be enabled. The second network must be one of the smaller players, such as American Express, Discover, or even China UnionPay. Since most credit cards today are issued by those larger banks, the overwhelming majority of cards would be affected.

The bill’s supporters are clear that their intent is to drive down interchange fees for credit cards, just as the original mandate did for debit cards. We already know the consequences. Annual fees, which today are assessed primarily on cards with rewards and benefits such as frequent flyer miles, will likely return for most cards. Rewards will disappear or become far less generous. And lower-income consumers, who spend less and thus generate less revenue, will find they have less access to credit.

But these are only the most obvious effects. Networks like Visa and Mastercard have developed sophisticated anti-fraud tools that rely on machine learning to monitor consumer card use. By intentionally fragmenting a customer’s traffic across multiple networks, the mandate would undermine the efficacy of these tools and expose consumers to increased risk of fraud. With the major credit cards denied the ability to recoup their investments by ensuring that traffic flows through their networks, there could be a vicious downward spiral toward less security and reliability in transactions.

When Durbin introduced his 2010 amendment, he explained that it applied only to debit cards because credit cards carry a risk of default and associated costs of collection, so the fee is “understandable” to compensate for that risk. Credit cards still carry that default risk, but the proposed legislation would disrupt how banks and credit unions manage that risk, in the process threatening to make credit less available for consumers and small businesses. In fact, the new bill would magnify the effects of the original Durbin amendment, harming rich and poor consumers alike.

Julian Morris is a senior scholar with the International Center for Law & Economics (ICLE). Todd J. Zywicki is George Mason University Foundation Professor of Law at Antonin Scalia Law School and a senior fellow at the Cato Institute.