May 1, 2017

Durbin's Debit-Card Price Controls Hit the Poor Hardest

Todd Zywicki

Senior Fellow, F. A. Hayek Program for Advanced Study in Philosophy, Politics, and Economics

Julian Morris

Vice President of Research, Reason Foundation

On Tuesday the House takes its first step toward reforming the Dodd-Frank Act when the Financial Services Committee marks-up Chairman Jeb Hensarling’s Financial Choice Act. One surprisingly contentious provision of Mr. Hensarling’s bill—dividing even Republicans usually suspicious of price controls—is also one that could do the most good for small businesses and American consumers: repeal of the so-called Durbin Amendment.

Sen. Richard Durbin’s 11th-hour addition to Dodd-Frank imposed price controls on the service fees banks with more than $10 billion in assets can charge merchants who process debit-card payments. As implemented by the Federal Reserve in 2011, the amendment ended up cutting these interchange fees in half—from 51 cents to 24 cents per transaction, on average—costing banks $8 billion to $14 billion annually. Although Mr. Durbin promised a safe harbor to community banks and credit unions, his amendment contained other provisions that have driven down their rates as well, by 19% in the case of PIN debit transactions.

Mr. Durbin asserted at the time that “every single Main Street business” would benefit from lower costs, and that they would pass those savings on to consumers in the form of lower prices at the register. But as we (with co-author Geoffrey Manne ) demonstrate in a new report for the International Center for Law and Economics, it hasn’t worked that way. While big-box retailers and their shareholders have managed to pocket more than $40 billion in cost savings so far, most Main Street businesses and the poorest American households have suffered.

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