Durbin Amendment: It’s Not Working
Congress gave giant retailers an $8 billion annual windfall through unprecedented price caps on debit interchange fees, under the guise of helping consumers – yet have steadfastly refused to commit to passing those savings along. This new law helps no one but giant retailers – while consumers, small businesses, and small financial institutions feel the sting of this misguided move by Congress.
Despite promises by giant retailers, there is no evidence that merchants have lowered retail prices.
Consumers are paying more for traditional banking services and dramatic cuts in rewards as financial institutions seek to replace $8 billion in lost revenue that previously paid for services like free checking.
- A September 2011 survey found that just 45 percent of noninterest checking accounts are now free, down from the peak of 76 percent just two years before.
Small merchants paying increased fees under Durbin will drive up their costs to cover the difference.
- Redbox increased costs for DVD rentals by 20 percent in order to offset the higher interchange fee for small ticket items.
Less Convenience and Security
Consumers will need to carry cash — inconvenient and risky — as retailers may try to prevent customers from using debit cards for small purchases. Low income families may inevitably fall out of traditional banking if they are unable to afford these higher costs, further marginalizing them from access to needed financial services and growing the unbanked population.
We’ve Seen This Story Before
A mandated reduction in interchange fees harmed consumers in Australia by raising cardholder fees and reducing card benefits. According to a report by CRA International:
- On average, the annual fees paid by consumers increased 22 percent from 2001 to 2004 while annual fees for rewards cards increased by 47-77 percent.
- Australian consumers are now paying $480 million more in additional fees. Australian merchants, on the other hand, are benefiting — to the tune of $850 million per year in higher profits.
The same small businesses that giant retailers hid behind to achieve their legislative victory are now the ironic victims of this ill-conceived regulation.
“Merchants now are trying to offset their higher rates by raising prices, encouraging customers to pay in cash or dropping card payments altogether.”
— Debit-Card Fee Cap Has Nasty Side Effect, The Wall Street Journal, Dec. 2011
Mom and Pop shops will pay MORE in interchange fees as the Durbin amendment is increasing the cost of accepting debit for everyday items, like a cup of coffee or a turkey sandwich. These increased costs may force small businesses to raise prices, or take losses to their bottom lines as they are unable to compete with larger retailers with economies of scale on their side.
- Prior to government intervention, interchange was about 1% for a debit transaction. Now price-controlled transactions — both the $2 muffin and the $2,000 television — are subject to the same rate of a few dimes (21 cents plus a penny for fraud, plus .05% of the transaction). For the muffin vendor, that’s nearly a 1000% increase in interchange fees. For the big-box retailer selling the flat-screen TV, they’re paying nearly 100% less. Small merchants selling everyday items are paying the price so that big-box retailers can profit.
Small Financial Institutions
Community banks and credit unions will ultimately be harmed along with larger financial institutions. Despite the theoretical carve out for smaller institutions, merchants will likely be able to drive down all interchange fees because of the leverage gained by the Fed’s draconian price caps. The routing and exclusivity provisions, which will come into effect on April 1st and contain no such carve out exacerbate the negative impact for small banks as retailers begin to route more transactions over lower-rate networks.
In order to survive and maintain their debit card programs, these institutions will face an impossible decision to either increase fees, or stop issuing debit cards altogether. Regional financial institutions have already attributed the Durbin amendment to branch closures and job layoffs.
- IBC Bank of Laredo, TX is closing 55 branches and laying off 500 employees.
- Associated Bank plans to close 21 branches in its three-state territory of Wisconsin, Illinois and Minnesota in early 2012.
Government Regulators on Harm to Small Financial Institutions
While coalitions of small banks and credit unions immediately spoke out against the enactment of the Durbin amendment, protestations even came from government regulators who warned of the harm that the Fed’s debit card interchange rule could harm small financial institutions, and should be examined more carefully.
- “[The rule is] going to affect the revenues of the small issuers and it could result in some smaller banks being less profitable or even failing.”
— Federal Reserve Chairman Ben Bernanke
- “I do think that this is going to reduce revenues at a number of smaller banks and they will have to pass that on to customers in terms of higher fees.”
— John Walsh, Office of the Comptroller of the Currency
- “The current rule’s prohibitions against network exclusivity and merchant routing restrictions could significantly increase both fixed and variable costs for these small institutions, resulting in an inability to remain competitive with larger card issuers.”
— National Credit Union Administration