As a professor of economics, I study how economic policies affect the financial status of households and businesses, especially those who are lower income or in marginalized communities. This is important because policies that often have good intentions can have unintended negative consequences. Debit card interchange regulation is one of those cases.
Let us start with a bit of context. At the end of 2020, there were over 2.1 billion payment cards in circulation in the United States for an adult population of about 258 million. Among noncash payments, the number of debit card transactions has been the fastest growing according to the 2022 Federal Reserve Payments Study. Debit cards have thus become an important payment tool for US consumers and businesses and are a matter of convenience.
In 2010, Senator Durbin (D-IL) introduced an amendment to impose interchange regulation on debit cards. The basic, and I think well-intentioned, rationale was that placing a maximum on how much banks can charge to process card payments would benefit businesses and eventually, consumers through lower prices. Despite some contention over the potential impacts of the proposed policy at the time, the Durbin Amendment was passed into law as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act.
Since October 2023, the Board of Governors of the Federal Reserve System has been considering another proposal to lower the maximum interchange fee on debit cards. Contrary to 2010, there is now backward-looking evidence on the impact of the above-referenced Durbin Amendment on US consumers and businesses. The punchline is that these types of price-control policies do not bode well for either group.
The best evidence of this, in my view, is presented in a 2022 article by Vladimir Mukharlyamov and Natasha Sarin. They use data on card processing fees and find that the Durbin Amendment led to higher checking account fees for consumers. In addition, the policy seems to have accelerated adoption of credit cards with higher interchange fees, thus reducing, and possibly offsetting entirely, the savings that businesses initially got from the policy. In fact, a 2014 Federal Reserve Bank of Richmond study by Neil Mitchell, Scarlett Schwartz, and Zhu Wang found that about three quarters of businesses failed to change prices due to the Durbin Amendment while one quarter increased prices.
These are exactly the unintended consequences that I referenced at the beginning of this article: While the intention of the Durbin Amendment was to benefit businesses and consumers, the policy ended up having the opposite effect. Perhaps this is not surprising since companies, in this case banks that issue payment cards, generally are profit maximizers and will find alternative ways to counteract losses to any policy.
The above findings are consistent with those of several other researchers. For example, a recent review of the evidence by Nick Bourke reports that consumers will pay an extra $1.3 billion to $2 billion annually in higher bank account fees as a result of interchange regulation. As with the original implementation of the Durbin Amendment, these fee increases would result from a variety of changes to account terms that make it harder to avoid fees. For example, bank accounts with no maintenance fees would become less common and the average minimum deposit required to qualify for fee waivers would increase. This is further documented in a 2017 Federal Reserve Board working paper by Mark Manuszak and Krzysztof Wozniak.
In this 2022 study, I reviewed some of the evidence on related payment-card policies in other countries. There too, similar unintended consequences followed from interchange regulation. For example, reductions in interchange fees by the Reserve Bank of Australia led to higher cardholder fees and less valuable reward programs. Meanwhile, the Retail Council of Canada found that if the interchange fee were reduced, it would lead to Canadians being worse off due to loss of rewards and increased annual card fees.
While interchange policies may have a stated goal of benefitting businesses and consumers, they have the opposite effect. They especially hurt consumers by increasing the cost of banking, which is particularly concerning for those who are lower income or in marginalized communities. For example, a 2019 Federal Reserve report found that 63 million Americans are either unbanked or underbanked. A main reason for this seems to be high fees on checking accounts and other traditional financial products. So, increased fees due to interchange regulation will only further marginalize this segment of the US population. Similar concerns have been raised in Federal Reserve Governor Michelle Bowman’s statement on the proposed revisions. I urge policymakers to take heed and closely examine the existing evidence before further hurting American consumers and businesses through interchange regulation.
