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It sometimes amazes me how many proof points Congress needs to act on an issue. Here is hoping that on the matter of debit card interchange fees, a recent Federal Reserve report is the straw that breaks the camel’s back.
The new study recently published by two Federal Reserve economists provides definitive proof, once again, that the Durbin amendment is a failed public policy. This deep dive examines the impact these price controls have had on consumers, and comes to the same conclusion that we and many others have been telling Congress for years: it hurts the very people Congress says they are trying to protect.
The Federal Reserve Board of Governors recently released a report called “The Impact of Price Controls in Two-sided Markets: Evidence from US Debit Card Interchange Fee Regulation.” That dense title is one that few consumers—or even policy wonks—will put on their August reading lists.
They should. It proves, yet again, that lawmakers like House Financial Services Committee Chairman Jeb Hensarling (R-Texas), Reps. Blaine Luetkemeyer (R-Mo.), and Ted Budd (R-N.C.) and others were right: the Durbin amendment, shoved into the 2010 Dodd-Frank bill at the last minute by politicians doing the bidding of merchants like Walmart, is the reason that American consumers are paying more to bank.
In the Hans Christian Andersen tale the Emperor Has No Clothes, a king is convinced by two scam artists that they can weave him a suit that can only be seen by the best and brightest in the land. As the Emperor parades around naked, his subjects are fearful to comment because they don’t want to be viewed as stupid. It finally takes a child to blurt out what is clear to everyone – that indeed the emperor was wearing nothing at all.
This story is reminiscent of the fairy tale retailers have been telling for the past seven years – trying to convince Congress that price controls on debit card interchange fees are beneficial to consumers and small businesses.
Target’s recent settlement with 47 states and the District of Columbia over the retailer’s 2013 data breach brought to mind this well-known John F. Kennedy quote: “There are risks and costs to a program of action — but they are far less than the long-range cost of comfortable inaction.”
The $18 million settlement is in addition to $202 million in legal fees and other expenses resulting from the breach, in which hackers stole data from up to 40 million credit and debit cards of shoppers who had visited Target stores during the holiday season.
WASHINGTON—(June 8, 2017)—The Electronic Payments Coalition (EPC) applauds House Financial Services Committee (HFSC) Chairman Jeb Hensarling and Reps. Blaine Luetkemeyer (R-MO) and Ted Budd (R-NC) for speaking out today on the House floor in defense of the consumers, small businesses, credit unions, and community banks harmed by the Durbin amendment. Although repeal of the Durbin amendment was removed from the CHOICE Act, these leaders stressed the importance of ending this failed policy.
“As Chairman Hensarling, Reps. Luetkemeyer and Budd stated, price controls have no place in government policy, as they go against free market principles and always end up hurting consumers,” said Molly Wilkinson, executive director of EPC. “For six years too long, the Durbin price controls have allowed big box retailers to pocket $42 billion at the expense of consumers, small businesses, community banks, and credit unions. We appreciate their leadership in the fight to end this merchant markup and urge Congress to support efforts to repeal this policy.”
Today on the House floor, Chairman Hensarling declared that, “When government fixes market prices, consumer welfare suffers. It’s not a surprise that the Durbin amendment resulted in a net loss of perhaps $25 billion for consumers … I remain hopeful Congress will correct this mistake, and I will work towards that goal in the future.” Led by Chairman Hensarling, two separate Congresses have taken action in the past year to repeal the Durbin amendment. In September 2016, the 114th Congress’s HFSC passed the CHOICE Act of 2016, which included Durbin amendment repeal. In May, the HFSC of the 115th Congress voted once again to end the provision as part of CHOICE 2.0.
Rep. Luetkemeyer also reiterated support for the repeal of the Durbin amendment, explaining that “Congress should not be in the business of price fixing. Price controls will never work and will always have negative consequences. I’m committed to returning to free market principles that deliver real results for consumers.” In addition to serving on the HFSC, Rep. Luetkemeyer is also the Chairman of the Subcommittee on Financial Institutions and Consumer Credit, as well as the Vice Chair on the House Small Business Committee. As a former community banker and small businessman, Rep. Luetkemeyer has long been an advocate for these institutions which contribute to economic growth.
Also on the House floor today, Rep. Budd explained the Durbin amendment has hurt low-income consumers and that those “who campaigned on a platform of free markets and limited government” should stand by their principles and support repeal. A freshman congressman, Rep. Budd grew up in a family business and now owns a small business in North Carolina. After being assigned to HFSC in January, he announced his commitment to promoting “free market principles [and] entrepreneurial spirit.” He has spoken out against the Durbin amendment multiple times for allowing the government to intervene in the free market.
According the International Center for Law & Economics, the Durbin amendment and its disastrous outcomes have particularly hurt low-income consumers, who rely on free checking and other banking services, as well as small businesses. In fact, a report by Javelin Strategy & Research showed that small merchants care more about value, rather than cost, when it comes to debit card transactions and fees, underscoring the importance of a competitive free market system.
“Multiple studies confirm the Durbin amendment has failed to benefit anyone but big box stores, who have not passed along savings to consumers as promised, while retailers continue to peddle the same misleading study in order to protect this special interest handout,” said Wilkinson. “We look forward to working with Congress to repeal the Durbin amendment and bring needed relief to consumers.”
To learn more about the Durbin amendment’s failures, click here.
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In a disappointing turn of events, Congress has decided to strip out crucial language from the Financial CHOICE Act that would have righted a serious wrong done to consumers over the last seven years.
Last month, the House Financial Services Committee voted to include language in the bill to repeal the disastrous Durbin amendment, and do away with price controls on debit interchange fees that have provided retailers $42 billion in profit since 2011. These same retailers promised to lower prices for their customers with the additional revenue, but those savings never materialized and in many cases prices have been increased. Tacked on to the enormous Dodd-Frank bill in the 11th hour, the Durbin amendment was full of empty promises that were never fulfilled.
Every time there is a retailer data-security breach, credit unions step forward to make their members whole. A NAFCU survey found that its member credit unions paid an average of $226,000 each in costs associated with retailer data breaches in 2014. Meanwhile, large companies like Target might lose less than one-tenth of one percent of their annual sales due to a data-security breach; and if they want to recoup expenses, they can always raise prices. Credit unions, as not-for-profit, member-owned institutions, have no such remedy.
It’s time to get a national data-security standard in place for retailers. And to do that, we need everyone in the industry – trades, credit unions and the more than 107 million credit union members nationwide – to raise their voices and make Congress take action.
The Financial CHOICE Act, which begins to untangle the web of harmful rules that Dodd Frank put in place, is likely to pass the House this week. That’s very good news for community banks and credit unions, but it doesn’t mean Congress’s work on financial reform is done.
One CHOICE Act provision, repeal of the Durbin amendment, was left behind. That’s why, after wrapping up the CHOICE Act, the House Financial Services Committee must go back and pass Durbin amendment repeal again. It’s already done so in two separate congresses—because it’s the right thing to do. Repeal will help the community financial institutions that are the backbone of our economy. And it will prevent the retail industry from continuing to pick the pockets of consumers.
In what American Commitment President Phil Kerpen called “a gutless sacrifice of principle,” last week the House GOP capitulated to relentless lobbying from big retail interests by stripping language repealing price controls on debit card use from the Financial CHOICE Act.
This is not only wrong because the effect of the price controls has been to increase costs for those on the margins of the banking system – the underbanked – but because price controls are always harmful. They distort the normal working of supply and demand and generally benefit most those whom they were not intended to help in the first place. Thus, for example, the debit card price controls were purported to help small merchants, but in many cases they saw their costs go up, as they lost access to deep discounts they had before the price controls were introduced (the price ceiling actually became a floor.)