In 2008, the Great Recession hit with a crash, bringing the nation’s economy to a screeching halt in the largest financial downturn since the Great Depression. In the specter of economic ruin, and in typical, knee-jerk fashion, Congress sought to “tame” the banks, resulting in the unmitigated disaster known as the Dodd-Frank Wall Street Reform and Consumer Protection Act.
Buried amidst the roughly 2,300 pages of legislation lay the Durbin Amendment, a government scheme to implement price controls on debit card transactions.
While debit cards have revolutionized the speed and convenience of the payment industry, banks bear the brunt of high costs associated with maintenance and theft protection. Prior to the enactment of the Durbin Amendment, “interchange fees” of 1-3 percent were charged to merchants to mitigate these costs, averaging 1.15 percent per transaction.
The Durbin Amendment, which capped the interchange fee at a maximum of 21 cents per transaction, prompted card companies to charge the same maximum processing fee for all transactions — both large and small.
Translating to a sharp increase in expenses for small businesses, and a huge benefit for big box retailers, these price controls represent the worst of crony capitalism. This is further evidenced by the corporate connections of the amendment’s sponsor, Sen. Dick Durbin (D-IL).
When Durbin introduced the amendment on the Senate floor, he stated, “I had the CEO of Walgreens contact me last week, and he told me that when they look at the expenses of Walgreens … it turns out the fees that Walgreens pays to credit card companies is the fourth largest item of cost for their business.”
These comments shroud the amendment’s intent in controversy, especially when considering the fact that Walgreens is a big donor to Sen. Durbin. In addition, although large retailers have seen massive savings as a result of the amendment, there is no evidence of retail price drops according to a George Mason University study.
Other detrimental effects of the Durbin Amendment include the demise of free checking, consumer banking fee increases of $8 billion per year, and the restriction of debit/credit card usage for smaller transactions.
When the Financial Choice Act, an effort to circumvent or remove the worst of Dodd-Frank spearheaded by Chairman Jeb Hensarling of the House Financial Services Committee, was advanced on May 4th, it included a provision to repeal the Durbin Amendment—including its disastrous price controls.
Unfortunately, this version of the bill was short-lived. As reported by The Washington Post, House Republicans reported intense pressure over the measure from retailers in their respective congressional districts, forcing Chairman Hensarling to scrap the repeal effort on Wednesday evening.
“I’ve said before that repeal of the Durbin Amendment was the most contentious part of the bill among Republicans,” Chairman Hensarling reportedly stated, further expressing, “I believe it belongs in the Financial Choice Act, but I recognize and respect that many members of Congress feel differently.”
Repeal of the Durbin Amendment would make good on President Trump’s campaign promise to “dismantle” Dodd-Frank, and would liberate free market enterprise. The Durbin Amendment, which never received a hearing before the Financial Services Committee, was an ill-considered reaction to a complex economic phenomenon.
On May 18th, Rep. Tedd Budd (R-NC) spoke on the House floor regarding the Durbin Amendment’s repeal, declaring, “There’s six to eight billion dollars per year at play here, and the violation of a core free-market principle: the notion that government should not be telling people what they can or can’t charge.”
“I oppose the Durbin Amendment: because I am not sure that this price control is necessary, and before I put the federal government in the role of judge, jury and executioner for the payment industry, I would have to be sure,” Rep. Budd concluded.
The Durbin Amendment represents an institutional embrace of crony capitalism, and has no place in a free market. House Republicans should aid Chairman Hensarling in his noble efforts to undo the catastrophic effects of Dodd-Frank, instead of capitulating to “Big Retail.”
