The Not-So-Friendly Sen. Dick Durbin Amendment
Price controls are never a good idea, yet they seem to be a staple of policymakers across the globe. Inevitably, they result in dislocations in the market that frustrate both consumers and producers. If prices are too low, shortages emerge leaving consumers in the cold and producers disinterested in serving that market. High prices create gluts, as unwanted goods sit on the shelves while producers are enticed to produce even more. So it should be no surprise that Sen. Dick Durbin's (D-Ill.) attempt to control fees on debit cards has done little to help consumers, while the retailers who lobbied for the law are quietly pocketing billions.
One study found that the Durbin Amendment transferred more than $8 billion from banks to retailers.
In response to a longstanding debate between retailers and card issuers, Mr. Durbin quietly added an amendment to the Dodd-Frank financial services overhaul that mandated the Federal Reserve impose price caps on "swipe fees," the price merchants pay for the convenience of accepting debit cards. In response, the Fed issued its rules in 2011, capping the fees at $0.21 per transaction. Unsatisfied with the price caps, retailers pushed for more in a case filed by the National Association of Convenience Stores. The judge in that case issued a sharp rebuke, striking down the Fed's regulation and demanding they set new rates preferably around one-third to one-half of the original rate. More recently, the Fed has appealed the decision, while a stay keeps the $0.21 cap in place. The outcome of this case will shape the future of a technology that has been beneficial for all users.
Merchants have been the primary objectors to the unregulated market. They enjoy the benefits of the system, but may not like the prices they have to pay to use it. Price is an important issue, but as in any competitive marketplace, prices are best established by negotiations between willing buyers and sellers, not government mandates. Competing networks exist, consumers and retailers are free to use whichever cards they like (or cash), and the market continues to evolve and innovate. Price controls threaten this dynamic and limit incentives to invest further in the networks that generate the convenience enjoyed by both consumers and retailers.
In fact, consumers have already felt the pinch of the price caps with the disappearance of free checking, and additional fees at banks and credit unions. Indeed, fees on checking accounts have increased by 25 percent since the passage of the Durbin Amendment. Despite the pro-consumer arguments made by the retailers, the real world application of the Durbin Amendment is not so consumer friendly. One credit union recently announced that the price caps will create $35 million to $45 million in losses, causing the credit union to revisit pricing on other consumer products such as mortgages and other loans.
Like most regulations, the cap on debit card fees generated some unintended consequences. One significant result has been the rise of the prepaid card, which does not fall under the Fed's price cap regulation. In 2013, prepaid cards will reach a value of $117 billion, a 200 percent increase from 2011. American Express and Chase both entered the prepaid market, and because the cards are exempt from the regulation, more banks will inevitably steer customers to prepaid cards. Unless this sparks calls for renewed regulation from retailers, the benefits of debit card caps may be short-lived. Prepaid cards are not as convenient as debit cards, but consumers can be enticed to adjust their behavior. In this sense, the price caps are restructuring the electronic payments market, and additional beneficiaries may not be the retailers who instigated the regulations.
Merchants must balance the needs of a wide range of customers by offering an array of competitively priced goods and services. These prices must cover the merchant's costs as well as provide a return. Interchange fees are simply a cost of doing business, and if the merchant believes card transactions will increase profits, that fee will be incorporated into pricing strategies, just as rent, wages and advertising are included. It would be far-fetched to assert that any of these should be regulated to keep costs down, which raises important questions about the efficacy of price caps on debit card fees. The Federal Reserve was right to appeal the recent court case that admonished the agency for not imposing even tighter price caps. Hopefully, the court will examine the broad impacts of the regulation on consumers, banks and others, rather than focusing on the narrow benefits sought by merchants.