In September, the House Financial Services Committee (HFSC) approved legislation that would repeal a Dodd-Frank provision called the Durbin Amendment that set limits on the fees some banks charge retailers to swipe debit cards.
In a frenzy of Orwellian doublespeak before and after this vote, Durbin Amendment supporters argued the provision is “free market” (it boosts competition!) and consumer friendly (it’s a vital part of U.S. antitrust law!). The majority of the HFSC didn’t fall for it.
That’s because the Durbin Amendment is more akin to President Richard Nixon’s price controls than anything else.
To prove this point, let’s first take retailers’ claim that the Durbin Amendment is necessary to ensure competition. The truth is that, even without the Durbin Amendment, merchants can—and do—directly negotiate with the networks to lower their interchange costs. They do so through a variety of incentive arrangements with networks, including deals in which the savings are rebated to the merchant. Some merchants prefer to handle the negotiation through their association or other group arrangement. Entire categories of merchants have obtained lower interchange rates based on their particular business needs.
For example, several networks voluntarily cap interchange on gasoline sales and established lower interchange rates for categories of merchants such as grocery stores, utilities, and convenience purchases. Also, merchants routinely switch processors for a better package and price—and therefore have a much greater ability to negotiate card acceptance costs than they do for most other business services, such as electricity, postage, water, or trash collection.
Merchants also argue that the Durbin Amendment protects consumers by preventing banks from colluding. Populist arguments are popular these days, but they are often misleading. The reality is that price controls on interchange revenues harm consumers.
Interchange fees are fees retailers pay for a service—a service that helps them do business, and enables their customers to make purchases securely. Interchange revenues cover a wide variety of costs for card-issuing banks and credit unions, including customer service, system efficiency and convenience, the costs of online transactions, protection of customer data, and card production costs, among many others. The safe, instantaneous, and secure system we enjoy today took decades and billions of dollars in investment to build. The maintenance and system operations require constant—and expensive—regular upgrades to maintain the latest in technology and cyber-security.
Retailers lobbying for the Durbin amendment aren’t on the side of the consumers. They’re trying to pad their bottom lines.
Retailers allege the EPC has relied on public opinion surveys to prove retailers haven’t passed on savings, but here is a direct quote from a Federal Reserve Bank of Richmond on the Durbin Amendment: “Few merchants are found to reduce prices or debit restrictions as debit costs reduce.” It is retailers that have used studies that have nothing to do with interchange to prove they’ve passed on savings. (As I argued in September, retailers cite a study by economist Robert J. Shapiro, but Shapiro uses a shoddy methodology to reach conclusions that heavily on assumptions taken from a paper written years before the Durbin Amendment was implemented — on a topic that has nothing to do with interchange.)
Retailers cannot hide the fact that their customers have not benefitted from these price controls. But we don’t need third party studies to reveal the intention behind the controls. In 2010, a Home Depot senior executive said, “[W]e think the benefit to The Home Depot could be $35 million a year.” That’s $35 million annually, to Home Depot alone, not its customers.
Industry-wide, we estimate retailers have pocketed $6 billion to $8 billion in additional profits each year because of the price controls.
The Durbin Amendment had nothing to do with antitrust. And interchange fees had nothing to do with the Great Recession. Pardon the pun, but big box retailers were shopping this provision well before Dodd Frank. Their lobbyists got it slipped into that bill with no public debate—and no analysis of the potential impact on consumers, the banking system, or the overall economy—because they promised to pass savings on to consumers.
That’s right: Retail price competition is part of the debate over the Durbin Amendment because, when the provision passed, big box merchants made it a part of the conversation.
They’d like to run away from those remarks today, but lawmakers shouldn’t let them. And, in September, the members of the HFSC didn’t. American consumers should thank them for that, and for defending the free market.
Wilkinson is executive director of the Electronic Payments Coalition. Thinking of submitting an op-ed to the Washington Examiner? Be sure to read our guidelines on submissions.
