Retail lobbying groups will descend on Capitol Hill this morning. They’ll have a few things on their agenda, including arguing that Congress should keep the 2010 Durbin Amendment, which set price controls on debit interchange fees and imposed new regulations on the handling of debit transactions. We know what these groups, which primarily represent big-box merchants and franchisor corporations, will argue. They’ll say that the Durbin Amendment preserves a free market and that consumers will suffer without it.
As I’ve written in these pages before: Lawmakers shouldn’t believe these “alternative facts.” Here’s what’s really happening.
Before 2010, banks and credit unions had the freedom to choose which payment networks they used for their cards based on the features these networks offered, including security and reliability. Consumers then selected cards based in part on these features, all with the confidence that merchants would honor their choice.
Post-Durbin, all U.S. debit cards must participate in multiple unaffiliated networks, and merchants, not consumers, dictate the network that is used. Not surprisingly, retailers typically select the lowest-cost network available — even if this choice may lead to increased fraud or impose additional costs on both issuers and consumers. Consumers are deprived of the benefits and protections they expect, and in many cases aren’t even aware of which network is handling their transaction.
Next, merchant lobbying groups will claim that Durbin corrected a market failure. Wrong again. In fact, courts have summarily rejected merchants’ price-fixing claims, specifically in 2008’s Kendall v. Visa U.S.A., Inc. Additionally, Congress never demonstrated a market failure before the Durbin Amendment’s passage. There actually was no hearing on the proposal. The provision was slipped into the Dodd-Frank bill by retail-friendly lawmakers because merchants knew they could pad their bottom lines.
Retail lobbying groups also will try to paint this legislative fight as “big” banks against “small” ones. After all, they’ll say, the Durbin Amendment price caps only apply to banks with more than $10 billion in assets. On paper, small banks are exempt from the Durbin price controls, but in reality the caps harm them. Small institutions’ debit revenues have fallen anywhere from 5 percent to 20 percent, depending on the type of transaction, since Durbin went into effect. That’s why groups representing local community banks and credit unions all argue strongly for repeal.
Next, merchants will trot out their consumer arguments, claiming prices will go up if the Durbin Amendment is repealed. This argument, of course, implies that prices went down after Durbin. They didn’t. The Federal Reserve Bank of Richmond asked retailers what they did with prices after Durbin. Only 1 percent — 1 percent! — said they cut consumers’ costs at the checkout counter. Some retailers, about one quarter, even admitted they raised prices. We estimate merchants have pocketed about $8 billion annually since Durbin was implemented in 2011.
Finally, retail lobbying groups might try to argue that merchants’ debit costs are too high. That argument ignores the value that retailers derive from accepting debit cards and the importance of interchange in making the electronic payments system function effectively. For example, it ignores the fact that interchange fees help financial institutions absorb part of the cost of fraud and major retail data breaches. It also fails to acknowledge that banks provide a variety of services that ultimately benefit both merchants and consumers. These services include fraud monitoring, creating and implementing new fraud prevention technologies, and maintaining and improving the U.S. electronic payments system infrastructure, which is the most advanced in the world. According to research from the University of Chicago, consumers have lost $22 billion to $25 billion as a result of Durbin due to higher bank fees and reduced services like these.
Here are the facts — the real ones. Retailers have lobbied against legislation that would improve consumer security at the checkout counter and aren’t passing Durbin’s savings on to consumers. So what have they done with their $42 billion in profits?
That’s a question lawmakers should ask merchant lobbying groups today.
Wilkinson is the executive director of the Electronic Payments Coalition.
The views expressed by this author are their own and are not the views of The Hill.