Dueling Studies Reach Opposite Conclusions About Consumers’ Durbin Savings

Durbin Amendment critics have long accused merchants of pocketing the billions they’ve saved since the amendment’s highly controversial debit card interchange price controls took effect two years ago Tuesday. Now, however, retailers are rolling out a study estimating that merchants passed on $5.86 billion in Durbin-related savings to consumers last year in the form of lower prices.

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Not only that, the savings likely spurred new spending by consumers and investment by businesses to support the creation of more than 37,000 jobs, according to the study commissioned by the Merchants Payments Coalition, a retailer-supported trade group.

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But the MPC’s nemesis, the Washington, D.C.-based Electronic Payments Coalition, a lobbying group backed by payment card networks and banks, released its own study today claiming that prices are increasing. The EPC has been tracking prices of consumer goods sold at national retail chains for the past two years, looking for evidence that merchants are passing on their Durbin-induced debit card acceptance savings. “MPC and their funders may have spent thousands on this so-called study, but it doesn’t take a hot-shot economist to see that consumers aren’t actually seeing any savings at the register,” an EPC spokesperson tells Digital Transactions News by email.

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The MPC’s study is not based on original research. Instead, it applied to the post-Durbin environment findings from a 2009 study that examined 23,000 promotions offered by approximately 1,000 grocery and drug stores in 30 states to learn how retailers reacted to reductions in input costs. That study, “Channel Pass-Through of Trade Promotions,” published in the academic journal Marketing Science, found that retailers passed on 69% of their savings and kept the remaining 31%.

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Economist Robert J. Shapiro, co-founder and chairman of Washington-based Sonecon LLC, which did the MPC’s analysis, says the Durbin Amendment reduced merchants’ interchange expenses by $8.5 billion last year. Durbin’s price cap of about 24 cents—21 cents plus 0.05% of the sale and another penny for fraud control—cut the debit card interchange revenues of regulated issuers, those with more than $10 billion in assets, by nearly 50%. Applying the 69% pass-through rate to the $8.5 billion, Shapiro estimates merchants passed on $5.86 billion to consumers by lowering prices, and kept the remaining 31%, or $2.64 billion.

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Using data from a variety of sources about consumer and business spending and investment behavior, Shapiro, also a senior fellow at the Georgetown University School of Business and former U.S. Under Secretary of Commerce for Economic Affairs, estimates that consumer demand increased enough from the Durbin savings to support 21,566 jobs.

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At the same time, businesses enjoyed savings that could have generated an additional 15,935 jobs. “The savings from swipe-fee reform have encouraged economic activity,” MPC chairman Mallory Duncan, who is general counsel of the Washington-based National Retail Federation, said at a Tuesday telephone press conference.

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If anything, the MPC study attempts to lay the economic groundwork for further regulation of merchants’ payment card acceptance expenses. The NRF and other plaintiffs in July won a huge victory when a federal judge ruled that the Federal Reserve Board, which Congress empowered to implement the Durbin Amendment, set the interchange cap too high. If the Fed had set the cap at 12 cents, which the central bank had considered, merchants would have saved another $4.04 billion last year, Shapiro says. The Fed is appealing the ruling.

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In addition, Visa Inc. and MasterCard Inc. raised interchange rates on small-ticket debit card transactions after the Durbin price controls took effect. Pre-Durbin, interchange averaged 16 cents on a $7.50 debit card sale, but afterward it rose to 22 cents, greater than the profit margin on many small items, according to the study. Revising the Fed’s rule to remove that increase would have saved $690 million in 2012, according to the study.

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Retailers would win the big prize, however, if they somehow persuade Congress to regulate credit card interchange. Shapiro estimates merchants in 2012 paid $41.2 billion in credit card interchange, or an average of $1.62 per transaction. “If the 24-cent cap on debit interchange fees covered credit cards[’] interchange fees on four-party payment networks like Visa and MasterCard, consumers and merchants would have saved an additional $22.4 billion in 2012,” his report says.

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At the press conference, Shapiro said his credit card conclusions are a “thought experiment” to get the debate going. He acknowledged that credit cards have different cost structures than debit cards, but he added that much of the credit card interchange merchants pay supports card issuers’ rewards programs. Those programs, he says, are lures by issuers to get consumers signed up for credit cards so that many of them will pay profitable penalty fees and interest.

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“The problem is that these [interchange] fees are passed along in higher prices to everyone regardless of whether you own a debit card or credit card or use a debit card or credit card,” he said. “And that’s the real social-policy problem with the way this industry is structured.”

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Meanwhile, the EPC reported findings from its latest survey in which its researchers bought identical baskets of goods in September 2012 and September 2013 at 16 locations of four national retailers—Wal-Mart, Walgreens, 7-Eleven and Home Depot.

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“Our field research found little evidence of any savings being passed along to consumers in the form of lower prices as a result of the Durbin Amendment price controls,” the EPC’s new report says. “Of the 16 retail locations studied, 13 locations—81%—have either raised prices or kept them the same since last year, and many raised their prices far above the rate of inflation. Just three stores lowered their prices since September 2012. Overall, customers now pay an average of 4.3% more for the same products than they did a year ago.”