Durbin Amendment 1.0 Did Not Work Well for Debit, Do Not Expect Durbin Amendment 2.0 to Work for Credit

If you ask the Federal Reserve, particularly one a hundred miles away from the nation’s capital in Richmond, Virginia, the Durbin Amendment failed to reduce merchant card processing costs. While the timing played well for the U.S. Senator, who ran for re-election in 2008 and 2014, the price controls did not meet the mission of reducing merchant costs.

In a 2015 study, the Richmond Fed found, “New survey results suggest that the regulation has had limited and unequal effects on merchants.”  The report, which you will find here, suggests the opposite.  Main Street merchants did not benefit.

  • In an attempt to resolve this issue, a provision of the 2010 Dodd-Frank Act, known as the Durbin Amendment, mandates a regulation aimed at reducing debit card interchange fees and increasing competition in the payment-processing industry.
  • The Durbin Amendment directs the Federal Reserve Board of Governors to regulate debit card interchange fees so that they are “reasonable and proportional to the cost incurred by the issuer concerning the transaction.”
  • The objective of this legislation was to lower merchants’ costs of accepting debit cards and to pass along the savings to consumers via lower retail prices.

The Economic Brief drew information from the Federal Reserve Bank of Richmond.. The findings were clear.

  • These results suggest that the regulation has had limited and unequal effects on merchants.
  • While issuers have lost billions in revenue, the costs of accepting debit cards have not gone down for many merchants in the survey, and for some merchants, the costs have even increased. Interpreting the reasons behind these unequal effects is not straightforward—nor is the regulation’s overall impact on end users (merchants and consumers)

In other words, the promise of reduced consumer costs and merchants did not materialize. This is not the first go-round. A study published by the University of Chicago Law School Journal discussed how attempts to place price controls failed in the land down under, in an article entitled “The Regulation of Interchange Fees: Australian Fine-Tuning Gone Awry.”  Also, Mastercard noted that consumer prices did not reflect the benefits of the decrease in the same market.

Here we sit against a recession. Inflation is running at record levels, and household budgets are under stress.  With little success in harnessing debit card costs, the Senator from the Land of Lincoln fiddles as Rome burns with a high-profile promise to curtail credit card costs.  Will the merchants win? Not if Durbin 2.0 works out as Durbin 1.0 did. Will consumers lose? Probably. Their reward programs will dry up, just as they did with debit cards. This time, as consumers face inflation rates north of 8%, they will see credit availability contract as issuers prepare for a recession.

And, when that happens, merchants will lose. They will not be complaining about the basis points of interchange but wondering where their buyers are, who now need to manage their credit cards that carry lower credit lines or do not exist, particularly for the marginally served.

Durbin 2.0 will not work. The text of the proposed “Bill to amend the Electronic Funds Transfer Act to require the Board of Governors of the Federal Reserve to prescribe regulations relating to network competition in credit card transactions, and for other purposes” can be found at this link.  It was introduced to the Senate Banking, Housing, and Urban Affairs Committee on July 28, 2022.  With a promise to reduce merchant costs, the bill also requires that merchants have the capability to process through competing networks, which will likely decrease data security, and add processing overhead while has not effectively worked under Durbin 1.0.

Banks will lose. Most merchants will not gain. And, the consumer credit holder will feel the pain in the long run as banks contract lending because legislators failed to pay heed to the dynamics of consumer credit.