Don’t buy merchant groups’ latest Durbin argument

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A Durbin do over is in the works, and that’s a good thing.

Back in 2010, the Durbin amendment, which caps fees on debit-card transactions, was snuck into Dodd-Frank at the 11th hour as a giveaway to the retail sector. Fast forward to 2017 and we see two things—retailers have pocketed the profits intended and promised to consumers, and Congress has an opportunity to right bad public policy in the form of price fixing.

{mosads}With the highly anticipated Financial CHOICE Act’s expected inclusion of a full repeal of the Durbin amendment, merchant lobbying groups are once again scrambling to find a new angle to protect a measure that hasn’t worked for anyone but them.

Federal Reserve data show that Durbin price controls have eroded small banks’ interchange revenues. Per-transaction fees on signature transactions were down 4.4 percent between January 2011 and October 2015 for small issuers, while fees on PIN transactions were down 19.6 percent.

The data also show that authorization, clearing and settlement costs at community banks and other low volume institutions are 17 times higher per transaction than those for high-volume card issuers. This data likely underestimates the true cost to small issuers because it omits several cost components, including transaction monitoring, customer inquiry and resolution, and card production and delivery costs.

So where are the Durbin amendment “savings” going? Big-box retailers have already admitted that they pocketed Durbin revenues instead of passing them on to consumers as promised. George Mason University’s Todd Zywicki has detailed how Durbin price controls hurt low-income consumers by decreasing the availability of free checking accounts, increasing account fees, raising minimum balance requirements, and eliminating debit rewards. And the Federal Reserve Bank of Richmond has found interchange fees for nearly 90 percent of smaller merchants either increased or stayed the same after Durbin.

Faced with these facts, Durbin supporters still argue the price controls are popular with merchants and consumers. While it’s not surprising that the big box merchants who pocket billions of dollars in new revenues each year should support the government’s intervention into the payments marketplace, consumers are suffering a loss of freedom and choice at the register.

In fact, Durbin allows big-box merchants to nudge customers toward using PINs at the checkout counter, instead of a signature. This “steering” means retailers get to bypass the network agreements that allow them to use electronic payment technologies. In other words, merchants can enjoy the benefits of the payments system—without having to pay for it, and while exerting control over their customers’ financial options.

Meanwhile, the requirement that issuers add two unaffiliated networks for debit cards is harming community banks as well. Since the Durbin provisions have gone into effect, merchants now can select between the two unaffiliated networks on the card, putting the merchant in charge of selecting which network the transaction is routed on. This assures that community banks under $10 billion in assets—who are exempt to the Durbin price-fixing provisions, but not these routing provisions—will face a gradual, yet persistent, decline in their debit card revenue because that choice now resides with the merchant. This requirement is also heaping substantial and recurring operational costs on Main Street financial institutions.

Merchants argue the exclusivity provision gives choice to community bankers, but we could choose which networks the transaction was routed on—one for signature, one for PIN— before the Durbin amendment. Now, multiple networks compete for the merchants’ business, not ours, and we merely support the options that merchants can select.

Furthermore, why do merchant groups think retailers are in a better position to make network routing choices than community banks? This is particularly interesting since financial institutions cover the majority of losses due to fraud. Doesn’t that fact meanwe’re the ones with the most incentive to ensure the security and efficiency of a network?

Before Durbin, community banks got to decide the best fit for themselves and their customers. Today—to boost big box retailers’ bottom lines—government regulators force community banks to undertake significant costs to add a second option that might not serve them well.

Here is what lawmakers considering the Financial CHOICE Act should know: any way you slice it, the Durbin amendment was bad for community banks and consumers.

We stood against the Durbin amendment in 2010 and we continue to oppose it today because bad policy is bad policy. With the advent of the 115th Congress, lawmakers have an opportunity to do something about it. For the sake of community banks and the customers and communities they serve, we ask the new Congress to repeal the Durbin amendment once and for all.  

Camden R. Fine is president and CEO of the Independent Community Bankers of America.

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


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