Durbin’s Swipe at Credit Cards Will Mean Black Eye for Consumers

Congress is not exactly known for passing laws that hit their targets squarely. All too often, innocent spectators to policymaking – usually consumers or taxpayers – end up with an unexpected roundhouse to the jaw. That unfortunate situation aptly describes the “Durbin Amendment” enacted nearly 12 years ago in the Dodd-Frank law. 

As NTU and others have written in the past, the Durbin Amendment’s caps (a.k.a. price controls and routing mandates) on debit-card transactions have failed to deliver the promised consumer benefits. Innovation and investment in secure payment networks was threatened, virtually none of the “savings” were not passed along to customers, while consumers experienced increases in other fees along with reductions in rewards programs. Small financial institutions, supposedly exempted from the Durbin Amendment, have nonetheless been harmed worst of all. Taxpayers have also suffered, as government purchase card accounts have often been affected too. 

Unfortunately, the response from many in Washington to these disappointing facts has been to keep punching, no matter who gets hurt. Recently, The Wall Street Journal (paywall) reported Senator Richard Durbin (D-IL), architect of the original amendment, wrote to Visa and Mastercard calling on them to abandon plans that would “raise many of the fee rates that your companies charge merchants and their customers for credit and debit card transactions.” Those companies had already suspended any planned changes in 2020 and 2021, and on net are not raising rates across the board. 

The letter contains a number of assertions that should disturb anyone who believes light-touch regulations, rather than heavy-handed government intervention, generally works best – especially in complex financial markets. For one, the major “swipe fees” for debit card transactions are already price-controlled, as Senator Durbin well knows. 

But the lawmakers signing the letter (which included Republicans) also accuse the two card companies of having a “duopoly” over the electronic payment system that “merchants, consumers, and small banks have no real choice but to accept.” This is likely a surprise to the significant market share that American Express and Discover currently have – while the current Durbin Amendment limits on debit swipe fees, poorly aimed at the card companies, are actually hurting small banks, according an association representing those very institutions (see above). 

The letter further argues that by altering interchange fee rates (again, part of which are already capped), the companies would “undoubtedly increase the high costs consumers are already facing and add to inflationary pressures.” This is a strange reversal, since the savingsfrom price capshave not been meaningfully passed on to consumers in the form of lower prices, according to the Federal Reserve. So, only “fee hikes”are passed through?

The letter also makes the judgment that the two companies’ “profits are already high enough.” Recently, Congressional Democrats have held several hearings to levy charges of greed and price gouging from the energy industry, which has a significant footprint in many “Red States.” Hopefully any Member of Congress supporting this letter doesn’t subscribe to the notion that the federal government should resurrect the failed concept of a windfall profits tax for energy, or more Federal Trade Commission (FTC) fishing expeditions. Tinkering in finance with new regulatory actions seems too fraught with similarities for comfort. 

And the similarities are right there in the letter, which mentions reports on payment networks’ security protocol requirements for merchants “may raise antitrust concerns.” Is this code for roping the financial industry into any of the progressive lawmakers’ legislative schemes for handing over greater power to the FTC and Department of Justice to reorder the economy to their liking?

Perhaps, perhaps not, but Senator Durbin’s financial services policy outlook has long been troublingly clear, and fiscal conservatives in Congress would do well not to share it. Imposing debit-card price controls and routing mandates, which act as backdoor price controls, on credit cards would, as an NTU-led coalition put it last year, “have far reaching consequences for everyday consumers and lower-income Americans who want or need credit.” 

It would be easy to accuse merchants and their allies of using false fears about inflation and struggling businesses and consumers to serve as cover for policy bromides that had been concocted long ago. The trouble is, the fears are genuine, but their target is misplaced. 

From airlines to energy, from manufacturers to technology providers, just about every part of the private sector carries heavy burdens from government – some that are distributed across the business world, others that fall on one particular sector. This is true of finance, which faces not only the typical business taxes, but also arcane regulations from at least a dozen federal agencies and a plethora of complex state-level taxes. The retail industry has had its own mountains to have to climb, ranging from property taxes on brick-and-mortar locations shut down or restricted the past two years by COVID orders, to tariffs that have made it costlier to stock their shelves, to supply chain and labor shortages that have more than a tenuous connection to public policy. 

The solution here is not to create more policies that disadvantage one sector for another’s benefit, but rather to take practical steps that make it easier for all businesses to serve their customers. For retail, that means:

1) Ending the trade constraints that have hurt American retailers and their customers more than the foreign concerns they were supposed to counterpunch.

2) Supporting policies that allow small retailers, especially, to bring high-demand goods into the country without onerous government-imposed costs.

3) Clarifying and making permanent the 2017 tax laws that can help larger retailers make long-term expansion plans and keep smaller retailers growing. The paperwork load heaped on merchants who claim the Section 199A small business deduction is considerable and previously far underestimated, according to NTU Foundation’s annual tax complexity study

4) For “click and mortar” retailers, reining in the practices of states that have failed to bring their sales tax collection systems in line with the simplification requirements of the Supreme Court’s Wayfair decision. 

5) Addressing labor, energy, and infrastructure policies and proposals that could raise costs for merchants, at a time when not only inflationary but recessionary pressures remain tight.

Government can have a role as a respectful, impartial, and unobtrusive referee in the competitive ring that is our economy. But when government assumes the role of a super-heavyweight to actually participate in the fight, the painful punches will land on everyone. And in the case of the Durbin Amendment, marginalized consumers and small financial institutions will be hit hardest.