This upcoming October marks the 10th anniversary of the implementation of the controversial Durbin Amendment -- a disastrous policy that established price controls on interchange “swipe” fees and new routing regulations on debit card transactions. The Durbin Amendmentwas tucked into the landmark Dodd-Frank financial reform bill at the 11th hour by Senator Durbin (D-IL) and has proven to be one of the worst examples of government overreach into private markets in recent memory. As NTU noted at the time of its implementation by the Federal Reserve, the Durbin Amendment would deprive financial institutions of “the ability to fund systems with market-priced fees” to the extent that “the networks – and eventually consumers and retailers – suffer.”
Unfortunately yet unsurprisingly, our predictions were proven true. The consequences of a federal price control on interchange fees -- which are used to maintain efficient card networks and fund new innovations -- have harmed lower-income Americans the most. Once the Durbin Amendment took effect, most credit unions and banks increased overdraft and ATM fees, reduced services, offered fewer accounts with free checking, and increased minimum balances. Additionally, proponents of the amendment argued capping these interchange fees would be a boon for limited-income Americans because businesses would lower prices on goods. Yet, there’s overwhelming evidence of the contrary: a Federal Reserve Bank of Richmond report noted 98.8 percent of retailers either raised prices or kept them the same after the legislation passed.
In short, misguided federal intrusion into America’s payments market hurt lower-income consumers by taking away important financial services products, and failed to lower the prices of products at the store. Add the Durbin Amendment to the already long list of legislative items with unintended negative effects caused by more government interference in well-functioning private markets.
As readers who closely follow NTU’s work on payments issues are no doubt aware, there remain significant government headwinds that could threaten to drive policy off-course, such as the Federal Reserve’s Real Time Payments Network, FedNow. Yet, readers should also be concerned about developments taking place in Congress, where some lawmakers have bigger, potentially more dangerous plans that would severely harm consumers. Chief among these lawmakers is, again, Senator Durbin, who remains laser-focused on finding new ways to harm networks through more distributive mandates onto them.
His most documented effort in recent memory is to extend his eponymous amendment onto credit cards. If a new cap on credit card interchange fees is enacted, credit card users will have the most to lose, as it’s likely
their cash-back rewards will be altered, higher annual fees will be imposed, or their credit limit will be reduced, among other negative effects. This is bad news for the tens of millions of Americans who have an open credit account, specifically those considered “subprime,” who make up 43 percent of cardholders. Per Verisk data, 77% of lower-income cardholders have an active rewards card. For these individuals, extra cash-back or “points” at the grocery store or the gas station can go a long way. Most importantly, a Phoenix Marketing survey found that 96 percent of cardholders believe their credit card rewards program is valuable to them.
Thankfully, it doesn’t seem like there is bipartisan momentum to pass this ill-conceived idea. Unfortunately, it’s not all good news for card holders. Senator Durbin is now championing a new idea: expanding government interference into credit card routing networks: the conduits through which transaction data move. Although this scheme is different from mandated limits on card fees, it is still a back-door price control that would hamper innovation in America’s payments market. We all have a lot to lose if it succeeds. Since new price controls would ultimately lead to less revenue, fewer companies would have an incentive to invest in more efficient networks, potentially hampering innovation that benefit consumers and merchants.
To be clear, Senator Durbin hasn’t unveiled any actual legislation yet, which means details remain unclear, but many have speculated about what a general framework for it could look like. According to reports, it could require merchants to complete credit card transactions over the cheapest routing network, rather than the most efficient or secure. Requiring the cheapest routing network option is a de facto price control on credit cards, a long-sought goal of Senator Durbin. Again, routing mandates and interchange fees are different approaches, but they lead to similar results.
It’s also said Senator Durbin has approached a few Republican members to join him, which could give the bill the coveted bipartisan seal of approval. From a limited government and taxpayer perspective, it would be extremely misguided for any Republican to support an expansion of government into payment networks via new routing mandates.
In fact, many taxpayer advocacy organizations understand the threat of routing mandates on credit transactions. For example, NTU joined a coalition of sixteen groups in a May 2021 letter, which argued “Consumers stand to lose the most with further government intervention and can expect to see a loss of rewards points, transaction security, and higher costs at check-out.”
These are essentially the same warnings NTU made in 2011 on interchange fees. Past is prologue, and the economic fallout from the Durbin Amendment seems more like current history -- a history that lawmakers need not, and should not repeat.