The Durbin Amendment, a last-minute addition to the 2010 Dodd-Frank financial reform law, has now been in place for two years, and though its benefits have been apparent and widely-cited by the law’s supporters, the costs are more opaque.
A new study by the Merchants Payments Coalition (MPC), a trade association of retailers, supermarkets, gas stations, convenience stores, and other businesses supporting the law, shows that debit card swipe fee reform under the Dodd-Frank Wall Street Reform and Consumer Act saved consumers and merchants billions of dollars in 2012 and may have created several thousand new jobs. But when you factor in the unseen costs of government price controls on debit card transactions, the aggregate benefits of the Durbin Amendment are significantly less.
According to the study, reducing the fees banks charge merchants per debit card transaction from 48 cents to 24 cents put $5.8 billion back into the hands of consumers through reduced costs and $2.6 billion were kept by merchants, facilitating the creation of 37,501 new jobs in 2012. The study also finds that had fees been cut to 12 cents, as originally recommended by the Federal Reserve Board, an additional $2.79 billion would have been generated in consumer savings and $1.2 billion more in merchant savings leading to an additional 17,824 jobs.
Additionally, the study concludes that if swipe fees for all credit card transactions had been held to the same level as debit fees in 2012, consumers would have saved an additional $15.4 billion and merchants would have saved another $6.9 billion, which could have supported 98,600 additional jobs per year.
So were free-marketeers wrong on the Durbin Amendment all along? Not quite. First off the job figures in the study are crude estimates, and not actually the result of surveying retailers. The Durbin Amendment, which retailers lobbied hard for at the eleventh hour, has also led to measurable harm. Studies have emerged that suggest consumers are not saving nearly as much as the Merchants Payments Coalition study finds.
New research from the Electronic Payments Coalition (EPC), a trade association of credit unions, community banks, and payment card networks, shows that retailers continue to hold on to the $8 billion annual windfall, without passing any of those savings along to consumers. Despite promises of lower prices, the study finds that 81 percent of stores raised prices or kept them the same in the last year, and many raised their prices far above the rate of inflation.
Since the Durbin Amendment was implemented, gone are the days of free checking accounts — an economic cost not factored into the MPC study. Previously, access to free checking had been growing in the United States, going from less than 10 percent of accounts in 2001 to 76 percent of accounts by 2009. That number substantially dropped in 2012 to only 39 percent of banks offering free checking accounts. The average monthly maintenance for non-interest-bearing checking accounts also increased by 25 percent, from pre-Durbin rates to $5.48 — the highest it’s ever been. The rise in these costs and reduction of free accounts is, in part, a result of the Durbin Amendment and it’s a cost that particularly impacts lower-income and younger households looking to open checking accounts for the first time.
The Durbin Amendment has also raised the cost of interchange fees on transactions $15 or less, to the point where the interchange fees on a small transaction can be greater than the stores profit margin. While the MPC study does conclude that this aspect of the legislation should be reformed, the damage has already been done. Companies like RedBox and Parkmobile, which strictly rely on small transactions to make a profit, began increasing their rates long ago in response to the increased swipe fees. Shortly after the Durbin Amendment passed, RedBox increased the price on movie rentals by 20 percent and Parkmobile increased fees on its mobile parking meter payment service by 40 percent.
The study contends swipe fee revenues have tripled in the U.S. in the past 10 years, while the actual cost of processing a debit or credit card transactions has been falling, suggesting that swipe fees should fall as well. But it fails to account for the cost increases that banks are facing trying to comply with all the regulations that have been thrown at them in the last few years, as a result of Dodd-Frank, which could end up costing banks hundreds of billions of dollars.
Recently a lower federal court judge ruled that the Federal Reserve Board did not implement the Durbin Amendment as the law required and ordered it to redraft the contentious rule, which could potentially lead to even lower swipe fees and greater price distortions. While this could lead to more “savings” in the way the MPC study calculates savings, the larger point is that regardless of whether the savings are passed along to consumers, government-set price ceilings for debit card services presume that the private market has failed and that the price set by Congress is closer to what the market price should be.
Never mind that debit card fees had absolutely nothing to do with the financial crisis yet they’re regulated under Dodd-Frank, or that the Fed shouldn’t be in the business of making policy, the mere fact that the cost-benefit analysis, after two years, is still unclear at best should be enough to convince people that the price set by the government is artificial. The price set by the government is usually never the market price, so the best option rather than reducing debit interchange fees further, or slashing credit card interchange fees next, would be for government to get out of the price control business altogether.