This week, big-box retailers and their lobbyists will be on Capitol Hill with an unenviable chore: to defend a policy that hurts consumers, harms small retailers and makes no economic sense.
Their goal is to protect the Durbin amendment, a bad policy passed through an even worse legislative process. More and more members of Congress now recognize that this change was a mistake that has resulted only in a massive windfall for large retailers.
The Durbin amendment — tacked on to the unrelated Dodd-Frank Act in 2010 at the last minute — called for the Federal Reserve to impose artificial government price controls on what a consumer’s bank receives for debit card transactions. These “interchange” fees support convenient payment account options for consumers and help pay for the robust payment security that banks provide to card customers. Today, these fees are set far lower than what they would be in a free market.
Retailers promised Congress that they would pass on their savings to customers in the form of lower prices. Seven years later, it’s clear that big-box stores had no intention of honoring this promise. In fact, according to the Federal Reserve Bank of Richmond, for every single merchant who lowered prices, 18 broke their promise and actually raised prices. It will be interesting to see how retailers explain their broken promises to members of Congress tomorrow.
Before the amendment passed, many banks and credit unions used their revenue from debit interchange to infuse value into their basic banking services, most notably by offering free checking accounts and debit card reward programs. But Durbin-driven revenue pressures forced banks reluctantly to limit these offerings. As a result, the Durbin amendment represents a loss of tens of billions of dollars in consumer value, according to researchers at the University of Chicago.
Consumers aren’t the only ones harmed by government price controls and retailers’ broken promises. Small businesses have also lost out to their much larger competitors. In fact, because of the way the transaction processing market works, the Durbin amendment has disrupted pricing structures that were advantageous to many small businesses. Far from helping Main Street by keeping costs down, brand-new research from Javelin shows that small merchants are more satisfied when given the opportunity to choose additional benefits, even if the cost is higher. In reality, small merchants who pay the lowest fees for payments and receive fewer benefits actually are less likely to be satisfied.
Lawmakers are also realizing that government price controls like the Durbin amendment make little economic sense. Retail stores would howl if Congress capped the prices of the food or clothing or equipment they sell. It’s no different in financial services. Bankers strongly support policies that promote a vibrant retail sector, but onerous price caps and regulations hurt consumers more than they help grow the economy. They also stifle innovation and limit how banks and credit unions invest in basic financial products that reach the underbanked. Simply put, the Durbin amendment extracts a high price from many for the benefit of a few.
Lawmakers now have a chance to stand with consumers. Coincidentally, as retail lobbyists are on the Hill tomorrow, the House Financial Services Committee will discuss Chairman Jeb Hensarling’s Financial Choice Act. Thanks to Chairman Hensarling’s leadership, the bill again includes a repeal of the Durbin amendment, which we support.
Seven years are more than enough to learn the lesson: The Durbin amendment — like all government price controls — hurts consumers and stops innovation. Repealing it would turn the tide and restore a free market in interchange.
Rob Nichols is president and CEO of the American Bankers Association.
The views expressed by contributors are their own and are not the views of The Hill.