Swipe Fee Ruling an Opportunity to Properly Test Durbin

A U.S. District Court judge's decision in July to strike down the Federal Reserve Board's approach to implementing the Durbin Amendment, which caps interchange fees on debit card transactions, seemed to upset nearly all parties involved.

The Fed must redraft the contentious rule or appeal it. Retailers said the decision was "giving in to the banks" and financial institutions face the possibility of a lower cap on fees.

But the ruling gives policymakers an opportunity to revisit the cap itself, and to find the best way to preserve access to financial products, lower costs and foster competition. For the sake of American consumers and businesses, they should take it. Price controls are risky business for any market, and with one as important as consumer payments, we should measure twice and cut once.

Debit cards are a critical tool for hundreds of millions of U.S. consumers, providing a convenient, safe and low-cost way to pay for everyday purchases. They are all the more vital in a time of high unemployment and volatile markets, when consumer credit is harder to obtain and few safe, accepted alternatives exist. Because banks and credit unions issue debit cards, they are subject to stringent oversight by state and federal regulators. And because debit cards are tied to deposit accounts, they pose relatively low risks to the safety and soundness of financial institutions.

The Durbin Amendment, which was passed as part of the Dodd-Frank Act, limited the fees that banks could charge merchants for processing debit card transactions. It was an unprecedented step, which grew from a concern about charges to merchants and consumers. But many members of Congress were rightly concerned about the ultimate impact of the amendment, particularly on small to midsize banks and credit unions. They wanted savings that merchants would pass on to consumers, and they wanted to increase competition, not put local institutions at a disadvantage.

Fifty-four senators, led by Jon Tester (D-Mont.) and Bob Corker (R-Tenn.), supported a proposal in 2011 to delay and examine the amendment. The Debit Interchange Fee Study Act called for a six-month regulatory study on the cost of the rules and their impact on consumers. There are good reasons to revisit that approach now.

Experience tells us that price controls often have perverse effects that hurt the very consumers they are meant to help. In a consumer payments market that goes well beyond debit cards, a binding ceiling on interchange fees could do just that. It could create an incentive to direct certain consumers towards prepaid or credit cards that aren't subject to the fee cap, when a debit card would be the most appropriate choice. It could cause other institutions to pull back on debit card offerings altogether, and on aggregate, make it harder for consumers to find a bank or thrift with the debit products that suit their needs.

The net effect of these shifting incentives is not yet settled. But the previous two years have given us a superb opportunity for a natural experiment, to test whether the costs of a government-imposed interchange cap truly outweigh the benefits. This is an opportunity Congress did not have when Dodd-Frank was passed, and it should avail itself of it. 

America's payment system will only become more vital to commerce as time goes on. Congress, regulators and the courts recognize this, and are committed to interchange regulation that works for both consumers and the financial system. That can only happen with more study. It is time to reconsider the Tester-Corker approach, and add certainty to the still-uncertain payments landscape.

Eugene A. Ludwig is a founder and the chief executive of Promontory Financial Group LLC. He was the comptroller of the currency in the Clinton administration.