Let's Not Repeat Failings of Pre-Durbin Age

In 2010, lawmakers passed bipartisan reforms to bring transparency and competition to a debit-card swipe fee market that had previously been devoid of both. Now, members of Congress want to undo that progress.

By seeking to repeal the so-called Durbin amendment, the Financial Choice Act — recently passed by the House Financial Services Committee — would restore the Visa-Mastercard duopoly, subject consumers and merchants to billions of dollars in new fees, and rob community banks and credit unions of their newfound competitive advantage in swipe-fee pricing over their big-bank rivals.

The amendment — added to the Dodd-Frank Act by Sen. Richard Durbin, D-Ill. — passed in 2010 with support from both Democrats and Republicans. Prior to its enactment, the card networks had used their overwhelming market power to manipulate fees at will and deny merchants and consumers of the typical pressures that restrain fee growth in a competitive market. Consequently, swipe fees ballooned. In fact, for merchants the cost of processing a debit card transaction was exponentially more expensive than processing a paper check.

Imagine a world in which it costs 10 times more to send an email than to mail a letter. That is the world that Visa and Mastercard had created for merchants. For merchants small and large, swipe fees had become and remain today their second-largest annual expense, exceeded only by the cost of labor.

Following the passage of the reforms in 2010, Discover CEO David Nelms seconded the perspective of merchants that the market was broken when he said, "Visa has tremendous market power in this area, and that's how we ended up here. Visa raised prices quite a bit and, I think, took the actions that have led to the legislation in the first place."

The fact is the reforms have largely worked, bringing swipe fees under control, creating competition between networks for merchant routing preferences and protecting banks with less than $10 billion in assets (which are exempted from the swipe fee cap).

The reforms have been limited only by the Federal Reserve, which did not go far enough in capping fees when implementing the mandate, as well as crafty efforts by Visa and Mastercard to try to offset the impact of the new interchange restrictions.

The only comprehensive study done on the impact of the amendment on merchant and consumers found that, in 2012, nearly $6 billion in merchant cost savings were passed to the consumer, while the "$8.5 billion in 2012 cost savings was sufficient to support 37,501 new jobs."

Further, small banks and credit unions have benefited from a competitive advantage over megabanks. According to the Philadelphia Federal Reserve, evidence exists that the reforms did "lower interchange fees collected by banks with assets above $10 billion" while "there was no such decline for small banks."

"Furthermore, after the ceiling was imposed, the volume of transactions conducted with cards issued by exempt banks grew faster than it did for large banks," the Philadelphia Fed study said.

Meanwhile, despite bankers' criticism of the amendment, a 2016 study by Moebs Services said, "the Durbin Amendment has yet to put a big dent into FIs' total debit interchange revenue, with banks and credit unions amassing $18 billion in [debit] interchange in 2015 — the highest total ever."

Finally, as Georgetown professor Adam Levitin pointed out in a BankThink post last year, comparing a bank fee survey conducted by the American Bankers Association from when the amendment went into effect to more recently, should put to rest concerns about free checking. Reform opponents predicted free checking would disappear, but the ABA surveys indicate it is actually growing.

The real impact that these reforms have had on the banking community does not match up with the protests and doomsday predictions made by those affected by the Durbin amendment.

But a repeal of these reforms would free Visa and Mastercard to once again wield their dominant market power to stifle competition and pile new and higher fees onto the market. For consumers and merchants, this is a horrific prospect.

Sandy Kennedy is president of the Retail Industry Leaders Association.