Congress Blog

Retailers have jumped the shark

How long does it take to admit something isn't working? One year? Four? Longer?

Sixty-five percent of all new television series are cancelled after their first season.

The average tenure for a head coach of an SEC football team is just over four years.

New Coke lasted seven years-but having suffered through that era, I can say that was probably too long. (The late Peter Jennings thought so. He heralded the return of classic Coke by breaking into daytime TV.)

This week marks the five-year anniversary of implementation of the Durbin Amendment, a provision in the Dodd-Frank Wall Street reform bill that set price controls on interchange fees for some debit cards. Like New Coke and Fonzie's infamous shark jumping stint in the fifth season of "Happy Days," this idea was a bad one.  

But unlike those two disasters in taste, the Durbin Amendment has had serious consequences.

First, the Durbin Amendment has eroded trust between American consumers and the retail industry. Lobbyists for merchants promised their clients, primarily big box retailers, would pass on savings from the price caps to their customers in the form of lower prices at the cash register. Sen. Dick Durbin (D-Ill.), architect of the amendment, and Rep. Peter Welch (D-Vt.) argued this week that retailers have kept that promise.

Sen. Durbin, Rep. Welch and big box retailers can't offer any evidence to support this claim, however. On earnings calls some retailers have admitted they didn't pass on savings and, according to the Federal Reserve Bank of Richmond, more than three-fourths of retailers didn't alter prices and nearly one-fourth actually raised them. Retailers often point to a study by economist Robert J. Shapiro as evidence they've passed on savings, but Shapiro's conclusions rely heavily on assumptions taken from a 2009 paper that has nothing to do with interchange fees and thus provides no evidence for retailers' argument. How could it? The "evidence" was released two years before the price controls were even implemented.

The Electronic Payments Coalition estimates retailers have pocketed $36 billion in additional profits from the Durbin price controls so far, with billions more accumulating each year.

In addition to eroding trust, the Durbin Amendment hurt consumers by leading to reductions in access to free checking accounts, raising minimum balance requirements and bank fees, and reducing debit card rewards and bank services. These consequences are felt most acutely by younger and lower-income individuals. In fact, George Mason University Professor Todd Zywicki has argued the Durbin Amendment was "one of the most destructive elements of Dodd-Frank" because it pushed these consumers "into the ranks of the underbanked and unbanked."

Retailers will also argue smaller financial institutions benefited from the Durbin Amendment. This statement is laughable. From the start, credit unions and community banks argued that, whether exempt or not (the Durbin price controls only apply to institutions with more than $10 billion in assets), they, and the small businesses and individual customers who depend on them, would be hurt. Data backs up these arguments too. The Federal Reserve has found, compared to January 2011, the average interchange fee for "exempt" issuers has fallen 16.6 percent for PIN transactions and 5.2 percent for signature transactions. Reports from both the National Association of Federal Credit Unions and the Credit Union National Association also suggest exempt institutions were significantly harmed by the price controls.

Next there is the claim that Main Street retailers are better off with the Durbin Amendment. False again. According to the Federal Reserve Bank of Richmond, among merchants with small-ticket transactions, nine times as many reported a cost increase as those that reported a cost decrease. Additionally, interchange fees declined for 11 percent of merchants, but increased for 31 percent.

Finally, the retail lobby has argued that, because of a new, anti-competitive European Union regulation limiting interchange, merchants in the United States pay some of the highest interchange fees in the world. The regulation has not been in effect long enough to make that comparison, so there is simply no evidence to support retailers' claims. (There is, however, already evidence that consumers are starting to pay for the EU retailers' handout through increased fees and loss of benefits, just as like consumers in the United States.) Credit and debit markets in the United States are considerably different than they are in the EU, so even if interchange fees are lower there, the associated costs and fees of acceptance most likely raise total costs for merchants and consumers roughly to the same level or greater than in the United States. Simply put, the EU provision is too new to know whether or not the total costs of accepting cards here are less than, greater, or the same in Europe.

It might be too soon to know that, but it is not too soon to know that debit card price controls have hurt U.S. consumers, small retailers, and community banking institutions. That's why, like almost all new TV series and certainly like new Coke, the Durbin Amendment is worth getting rid of.

Wilkinson is executive director of the Electronic Payments Coalition.

The views expressed by authors are their own and not the views of The Hill.

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