Five Years Later, What’s the Bottom Line on Durbin? Well, It’s Complicated

By John Stewart

Five years after it became the law of the land, the Durbin Amendment remains as controversial as it was then, with virtually no agreement in sight on such questions as whether merchants have cut prices in response to interchange savings or whether consumers have paid more for banking services as card issuers lost interchange income.

The amendment, which was bolted on to the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act late in the deliberations over that massive legislation, was a bit of an odd duck from the start. It regulates the interchange rates that big banks can receive on debit card transactions and mandates that merchants have a choice of unaffiliated networks for processing those transactions. But these comparatively arcane matters surrounding debit cards had virtually nothing to do with the 2007-2009 financial crisis that Dodd-Frank was meant to address.

Still, merchant lobbyists celebrated the amendment’s anniversary on July 21 by throwing the spotlight on how much consumers have benefited. They also took the occasion to call on The Federal Reserve, which administers the Durbin debit-interchange restrictions, to cut interchange even further. The Fed is due to revisit the pricing ceiling next year.

The Washington, D.C-based Merchants Payments Coalition, formed by retail companies in 2005 to push for limits on interchange, cited a statistic released in 2013 indicating retailers had by then passed on to customers about $6 billion in savings from Durbin’s interchange ceiling.

The rate cap, which amounts to about 24 cents per transaction, took effect in October 2011 and applies to issuers with $10 billion or more in assets. For those banks, the cap cut per-transaction debit interchange roughly in half, reducing their overall interchange income by $6 billion to $8 billion annually.

“Without reform, price-fixing of debit card swipe fees would still be unchecked,” said Mallory Duncan, senior vice president and general counsel of the National Retail Federation, in a release put out by the MPC. “Debit reform brought some rationality to s system that made card fees merchants’ fastest-growing expense.”

Sen. Richard Durbin, D-Ill., who lent his name to the amendment, marked the anniversary in part by pointing out how his legislation had not resulted in the widespread elimination of such services as free checking accounts. “The American Bankers Association reported last year that 62% of Americans pay nothing at all for bank services, and this year Bankrate.com found that 72% of credit-union checking accounts came with no maintenance fees,” says a release issued by Durbin’s office.

The statement also highlights how small financial institutions have kept a competitive advantage by having been exempted from the amendment’s price controls.

But, five years after its passage into law and nearly four years after its pricing caps took effect, the results of Durbin aren’t so clearcut. A study published last year, for example, found that the number of banks offering no-fee checking accounts dropped by 50% between 2009 and 2013. It also found the average monthly fee on these accounts doubled, from about $6 to more than $12. The combination of fee increases and loss of free accounts, meanwhile, led to an increase of 1 million in the unbanked population, chiefly among low-income families, the study found.

Equally vexed is the question of whether merchants have passed on their lower interchange costs to customers in the form of lower prices. But even allowing for at least some savings for consumers, a separate study concludes they have lost more from higher banking fees than they have gained from price cuts in stores, to the tune of $22 billion to $25 billion through the fall of 2013.

At the same time, small banks may have been exempted from the law’s price controls but they are still subject to its rules on debit card transaction routing. At least one top executive at a small bank says these rules haven’t done much for his business clients. “Small merchants, our customers, have no leverage to take advantage of least-cost routing, so this piece only benefits the big retailers with big hammers pounding on their card processors,” argues Bob Steen, chairman of Bridge Community Bank, Mechanicsville, Iowa, in an email message.

One thing is for sure: Durbin, like most regulation, has produced some results little foreseen by either its advocates or its opponents. “The unintended consequences of both Durbin and Dodd Frank are still being counted five years later,” notes Steen.