As of Oct. 1, the Durbin Amendment to the Dodd-Frank Act cut the permissible fees that the banks that issue debit cards can charge merchants. The “reform” will revolutionize retail banking — for the worse.
Sen. Richard Durbin and his merchant supporters claimed that the banks were in collusion with the big credit-card companies to charge the merchants extortionate fees. To get the amendment through, it exempted small banks, defined as those with assets of under $10 billion.
Pursuant to the Durbin Amendment, the Federal Reserve Board slashed these fees in half, costing banks in aggregate about $6.6 billion, which they were supposed to make up from direct charges to customers.
Bank of America, among others, accepted this invitation by imposing a $5 monthly fee on debit-card accounts, only to be met with political attacks for imposing a hidden tax on the poor. Banks have also scaled back their debit-card benefit packages to howls of customer protests. The supposed savings in merchant prices have yet to materialize.
Here are six reasons why the Durbin Amendment should be repealed.
First, it’s wrong to assume that the proper measure of the cost of servicing debit cards is, to use the language of the Durbin Amendment, the “incremental cost” of processing each “particular electronic debit transaction.” In fact, a huge chunk of the costs are incurred to set up and maintain the equipment and to service debit-card users. The residual fees don’t cover these costs.
Second, the banks and Visa and MasterCard did not form some giant conspiracy to artificially raise prices. If that were a valid beef, the government or merchants could have sued them at any time under existing antitrust laws.
But those suits did not have a prayer of success. Visa and MasterCard built their networks from the ground up, without cooperation. Those networks compete with each other, and they vastly simplify transactions by creating convenient pathways for tens of millions of customers to make transactions at low cost with millions of merchants.
Third, merchants are not ripped off by debit cards, which have many advantages over cash and checks. Electronic transactions are faster to operate; they generate sales records of value for the firm; they allow for the banks to guarantee payments by running instant checks to see whether they will accept payment; they eliminate the risk of bad checks or counterfeit bills, and they increase the size of median customer purchase. The merchants who pay more get more.
It defies credibility to think that retail behemoths are coerced into using these cards against their will. If debit cards cost them money, cost-conscious merchants would drop them in a Wal-Mart second.
Fourth, in complex networks, it actually pays for merchants (who are not particularly price-sensitive) to subsidize the costs of debit-card holders (who are price sensitive).
One hidden benefit that merchants get in exchange for their fees is the larger customer base generated by bank advertisement. That base allows them to spread their fixed costs over more customers, so that everyone wins. Cut out the cross-payments and the system becomes less efficient.
Fifth, the Durbin Amendment creates perverse market dynamics by letting small banks keep their old fees. Five bucks a month turns out to be a big deal in tough times. Durbin thus gives financially stressed large banks the unhappy choice of raising fees and losing customers, or keeping fees low and losing revenue on each transaction. That sounds confiscatory, to say the least.
Sixth, Durbin imposes heavy administrative and compliance costs on large banks, which hurts everyone.
What is doubly ironic is that before Durbin, debit cards were a booming business — bigger in total dollars and total transactions than credit cards. They were leaving checks, and increasingly, cash in the dust. In hard times, why should Congress kill off one of our few industry successes?
The only cure for this mess is repeal the Durbin Amendment as quickly as possible, before it can do permanent damage to the banking system.
Richard A. Epstein is an NYU Law professor, a Hoover Institution senior fellow and a University of Chicago senior lecturer. He consulted for TCF National Bank in litigation on this issue. Adapted from Defining Ideas at hoover.org