Last week the House of Representatives passed the Financial CHOICE Act, in an effort to overhaul the massive Dodd-Frank financial reform law passed in 2010. The stated aim of this bill is to scale back regulations that have hampered economic growth and consumer freedom over the past seven years. Unfortunately, House members passed on the opportunity to repeal an especially pernicious element of Dodd-Frank known as the “Durbin amendment,” a rule placing caps on the debit card fees banks can charge retailers known as “interchange fees.” Original versions of the bill would have repealed the measure, but on May 24 the bill’s architects dropped that language from consideration. That development was a win for large retailers who have benefited from the rule, and a loss for consumers.
When the Durbin amendment was under consideration in 2010, its supporters touted the promise of consumer cost-savings as its prize, whereas its opponents cautioned that arbitrary price controls would disrupt a well-functioning debit card market. Repeated lessons from history demonstrate that price-control measures fail to accomplish their objectives, eventually hurting consumers through unintended consequences, and the Durbin amendment is no exception. Failing to repeal this harmful provision is bad news for consumers, because the Durbin Amendment has cost Americans billions of dollars.
Merchants and large retailers, who heavily supported the amendment in 2010, have falsely claimed that a repeal would cost consumers money. However, since it’s passage, the amendment did not generate the savings for consumers its proponents predicted. A September 2015 survey of consumers by Phoenix Marketing International found that consumers haven’t seen lower prices – 92 percent actually saw the prices they pay for goods stay the same or increase. Rather than pass on the cost savings from the Durbin amendment on to consumer, retailers kept them. This assertion is further bolstered by a 2015 economic quarterly report produced by the Federal Reserve Bank of Richmond, which found that the amendment had only a limited effect on retail prices. According to the report, an estimated 77.2 percent of merchants, comprising a substantial majority of those surveyed, did not change their prices whatsoever after the rule went into effect. Only 1.2 percent reported reducing their prices (i.e. passing cost-savings onto consumers), while 21.6 percent copped to increasing prices.
Banks subject to the rule lost revenue from the interchange fees, to the tune of $14 billion per year. To offset these losses, banks raised fees and dropped free services in other areas. According to a study by Todd J. Zywicki, Geoffrey A. Manne, and Julian Morris, the Durbin Amendment is to blame for the decline in the availability of free checking or current accounts. The paper asserts “the total number of banks offering free current accounts fell by 50% between 2009 and 2013. In comparison, fee-free banking actually increased at banks not subject to the Durbin Amendment.”
The paper also describes how banks tripled the minimum monthly holding requirement (from roughly $250 to over $750) on free accounts between 2009 and 2012 and doubled average monthly fees on non-free bank accounts between 2009 and 2013 (from around $6 to more than $12). What’s worse is that the reduced access to free checking and increased fees are responsible for pushing 1 million predominantly low-income Americans out of the formal banking sector. Furthermore, consumers have largely shifted payment methods from debit cards to credit and prepaid cards, which are not subject to Durbin amendment price controls, meaning they have higher merchant fees and further preclude reduced consumer prices.
The big box retailers claimed they would pass along the resulting savings from price controls to consumers when the Durban amendment passed, but they failed to lower prices. Instead, these retailers pocketed the savings for themselves, and consumers lost out. While researchers may not agree on the total loss of consumer welfare resulting from the Durbin amendment (estimates range from between $6 billion and $42 billion), what’s important is that they agree that consumers have suffered.
As Senate Republicans draft their own version of the bill, they should correct the mistake made by the House and make sure that the Durbin amendment is repealed. Doing so would restore the free market, help the economy thrive, and most importantly, deliver the promised lower prices to consumers.