Banking is a universal concept – but, unfortunately, not ubiquitous.
For a service so core to the financial well-being of every American, access to banking is more limited than I and many others would prefer. More than five percent of U.S. households do not currently have an account with a credit union or other financial institution and nearly eighteen percent are “underbanked.” While that may not seem like a lot, that is approximately 16.5 million Americans with no access and nearly 59.4 million who have inadequate access to mainstream financial institutions in their communities.
In order to address this problem and provide a solution, it is important to understand why so many Americans find themselves in this position. Recently, the Government Accountability Office (GAO) – an independent and nonpartisan government agency – set out to learn why and review the factors affecting American families’ access to basic banking services. They found the Durbin Amendment ranked as one of the most harmful laws and regulations negatively impacting the availability of fundamental banking services.
The Durbin Amendment allows the Federal Reserve to put an artificial price cap on the interchange fees charged to large retailers every time a customer swipes a debit card. This legislation was enacted in the hope that it would spur economic growth by allowing large retailers to drop their prices – as they would be charged lower interchange fees – thus encouraging customers to spend more. But that hasn’t been the case. Instead, retailers and merchant coalitions are making record profits with the help of digital payments, and only about 1 percent of retailers actually have reduced prices for consumers.
More directly linked to the problem of the unbanked, the Durbin Amendment took critical resources away from smaller financial institutions, like the credit unions and community banks that my company works with every day. Our smaller institutions were forced to offset the interchange revenue losses by raising other fees consumers pay (monthly service fees, minimum balance fees, etc.), which affects not only the wallets of our customers, but also the success of the overall banking system.
The passage of this 2010 law has restricted the ability of credit unions and community banks to offer less costly resources to customers, and as a result America’s underbanked population has increased by 1 million people. Further, the GAO concluded lower- and middle-income Americans, including minority communities, are the most significantly harmed by the Durbin Amendment.
While the harmful effects of price controls and their impact on businesses, consumers, and financial institutions are not new by any means, it has often been difficult to provide direct evidence of the negative impact on the banking industry and our members/customers. However, this nonpartisan GAO report demonstrates how these price controls are directly tied to the reduction of issuer revenue, lack of access to free checking accounts, and higher checking account fees for consumers.
According to the GAO report, the Durbin amendment caused annual interchange revenue for banks to fall by more than twenty-five percent. And in a corollary finding, the GAO states the interchange cap is closely associated with increased costs of checking accounts and decreased availability of free checking accounts.
Making matters worse, some of the largest retailers in the world, like Amazon, Home Depot, Target and Walmart, are urging Congress to expand interchange price controls further in order to use government power to limit their costs and continue the growth they have achieved amidst the pandemic while so many small businesses were forced to close. This market intervention would take even more revenue away from the small community banks and credit unions that so many people rely on to financially support themselves and their families.
There is no question that these price controls are hurting everyday Americans. But what can be done to stop it? The answer is simple: it’s time to do away with the Durbin amendment, let alone permit its expansion to credit. For the last decade, our community businesses, consumers, and financial institutions have suffered from this detrimental piece of legislation. Large retailers cannot continue to profit off the hardships of everyday American businesses and consumers.