The Durbin amendment: The ultimate double whammy
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The Financial CHOICE Act, which begins to untangle the web of harmful rules that Dodd Frank put in place, is likely to pass the House this week. That’s very good news for community banks and credit unions, but it doesn’t mean Congress’s work on financial reform is done.

One CHOICE Act provision, repeal of the Durbin amendment, was left behind. That’s why, after wrapping up the CHOICE Act, the House Financial Services Committee must go back and pass Durbin amendment repeal again. It’s already done so in two separate congresses—because it’s the right thing to do. Repeal will help the community financial institutions that are the backbone of our economy. And it will prevent the retail industry from continuing to pick the pockets of consumers.

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The Durbin amendment is a double whammy: not only have consumers failed to see savings as promised—only one percent of retailers cut prices after Durbin, which means merchants so far have pocketed $42 billion—consumers also have lost banking benefits like debit card rewards. Meanwhile, credit unions and community banks have taken a hit to their interchange revenue because of the Durbin amendment.

The price control provision is the most talked about part of the Durbin amendment, but the routing mandate is just as harmful. This provision requires unaffiliated payment networks be added to debit cards. That might sound good in theory, but it is really a backdoor price control that sets off a race to the bottom. Think of it this way: the price control provision and the routing mandate allowed retailers to pad their bottom line, and consumers and the banks—particularly community banks—paid for it.

The routing provision is not about injecting choice into the payments system, it’s about who gets to choose. It used to be community financial institutions and their customers who decided where a transaction was routed. Today, it’s merchants. And with merchants in charge, it becomes a race to $0, with reduced quality and transaction safety to boot.

How would retailers like it if Washington let customers decide how much to pay for a television, the season’s hottest toy, or a gallon of gas?

They’d be outraged. But the merchant lobbying groups are willing to throw out principle when it comes to the payments system they enjoy. And they will rest at nothing to avoid paying their fair share for a debit card system that works so well for consumers.

While the Durbin amendment was supposed to hold community financial institutions harmless, they were affected nonetheless. According to Federal Reserve data, their interchange revenues have declined, dropping 16.6 percent for PIN transactions and 5.2 percent for signature transactions. We expect this pattern to continue as more transactions are processed through the cheaper networks.

Lawmakers also should consider the security ramifications of the routing provision.

Before the Durbin amendment, financial institutions entered into contracts with networks based on whatever features best suited their consumers. Since it’s banks and credit unions that protect individual consumers by shouldering much of the financial responsibility when fraud occurs, security was a chief concern. Before, these entities could be sure that their customers’ transactions went through the best possible network. Now they must rely on retailers to make that judgment—retailers who, unlike financial institutions by the way, are not subject to national data security standards.

In the past, merchant groups have tried to speak for credit unions and community banks, touting all of the “benefits” they received since the Durbin amendment went into effect. But if you really ask the individuals who provide financing for American communities and families, they’ll tell you that any law that puts profit-hungry retailers in charge is bad policy.

That is why repealing the Durbin amendment is an idea Congress should revisit.

Wilkinson is executive director of the Electronic Payments Coalition.


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