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Merchants Ignore Durbin's Toll on Their Customers

Retailers who claim that restrictions on debit card fees benefit credit unions and community banks miss the point: These price controls are bad for consumers.

After Congress passed the Durbin amendment — which was authored by Sen. Dick Durbin as part of the 2010 Dodd-Frank Act — merchants promised to pass the savings on to consumers in the form of lower prices.

The price controls lawmakers were able to impose on those providing electronic payment options have resulted in an $8 billion annual handout to retailers that they have not passed on to consumers. Five years after the Federal Reserve issued a rule to implement the amendment, retailers have kept most of this revenue — an estimated $32 billion — for themselves.

While Congress may have thought this legislation would provide a benefit to consumers, data from a survey of merchants contained in a recent Federal Reserve Bank of Richmond study indicates that the amendment is simply not working as intended. The report found that "few merchants are found to reduce prices or debit restrictions as debit costs decrease." This just reinforces the argument that the Durbin amendment is essentially a merchant handout from Congress.

Consumer research echoes the reality that retailers are not passing on this revenue in the form of savings for customers. In September, Phoenix Marketing International conducted its fourth annual survey of nearly 2,000 consumers and found that the vast majority of shoppers have not experienced a price drop at the point of sale. In fact, in each of the 15 categories measured, at least 92% of shoppers reported that prices rose or stayed the same over the past year.

In October 2013, the National Retail Federation said retailers have seen significant savings from swipe fee reform and are sharing that savings with their customers in a variety of ways. But the findings from the Richmond Fed and Phoenix Marketing International illustrate this is simply not the case.

Merchants are now trying to claim that these restrictions benefit credit unions and community banks. This is also not the case.

A study released last week by the Credit Union National Association reported estimated reduced revenue of $1.1 billion for credit unions resulting from Dodd-Frank's regulatory costs, all of which the report attributed to the swipe fee provision. Real data in the form of costs of processing changes and declining fees since 2011 debunks claims that credit unions and small banks below $10 billion in assets are not feeling the pinch. Further, there has been a decline in the interchange rate since the price controls went into effect. It continues to remain around 4 or 5 cents below where it was pre-Durbin, according to a survey by the National Association of Federal Credit Unions.

Unlike merchants, financial institutions do not simply pocket interchange revenues. Instead, in addition to the many costs of supporting a global payments network, they invest in developing the latest security technologies, such as real-time predictive analytics, EMV, tokenization, biometrics and end-to-end encryption, to help keep consumers' data safe. The financial industry has put billions of dollars toward these and other technologies, and many of the security solutions being implemented today were originally developed by this industry.

Unfortunately, lack of competition, market regulations and price controls have produced an economic environment beneficial to retailers and harmful to credit unions, small banks and — most apparent of all — the people they serve. Under the current price-controlled environment, Durbin has been a failure for everyone but retailers.

Instead of trying to convince credit unions and community banks that price controls are good for them, the retail industry's time is better spent identifying ways to pass along their $8 billion annual boon to their customers.

Jim Nussle is the president and CEO of the Credit Union National Association. Camden R. Fine is the president and CEO of the Independent Community Bankers of America. B. Dan Berger is the president and CEO of the National Association of Federal Credit Unions.


(4) Comments



Comments (4)
Article: "$8 billion annual handout to retailers..."

MPC: "No source was cited for this figure! Besides, banks are still making eleventy billion percent profits!" (cites no source for this figure)

This is why we can't have nice things.
Posted by zwansong76 | Friday, February 26 2016 at 9:26AM ET
WOW! Talk about "see what you want to see." The bottom line is the consumer is NOT getting the benefit promised and financial institutions (even small institutions) are not earning enough to cover all their expenses, including the fraud. Merchants are protected from fraud losses and saving billions on interchange but not passing it on. Anyone who thinks price controls work needs a history lesson.
Posted by C'mon Man | Thursday, February 25 2016 at 3:53PM ET
This article is just 'noise'. The response by the Merchant Coalition is more noise! Two greedy positions! Both taking the high road that they would help the real victim here, the Consumer! Both are trying to take the largest cut they can from a monopolistic situation creating excess profits being paid by the VICTIM CONSUMER. As a bank owner and CEO, both sides disgust me. Not a supporter of Durbin, as I am a free market LIBERTERIAN who hates to see government intervention. Congress created a temporary and arbitrary solution to a problem created by the lack of a 'market'. If their were a market, the marketplace would allocate the 'excess windfall profits' between the three sides; with the VICTIM CONSUMER receiving the greatest share of the windfall.

I suggest readers go back to earlier articles on this subject and attempt to figure out what group 'created the monopoly'. Whoever created the monopoly, was the originator/ creator of the government solution that two sides do not like. I would suggest that it was a group of banks who owned VISA/MasterCard who created the problem monopoly.
Posted by countrybanker | Wednesday, February 24 2016 at 6:16PM ET
Readers should note that nowhere in this piece do the authors explain how a law that specifically exempts their institutions from its provisions somehow hurts them.

Instead they try to do a little sleight-of-hand, hoping you won’t notice, by changing the subject and harping on the same old tired claim that retailers are reaping a windfall from debit reform.

They’re also hoping you won’t actually read the Federal Reserve Study that the banks continue to cite disingenuously as evidence of this windfall, but which in fact disproves their point.

That study showed 90 percent of merchants surveyed hadn’t seen any savings from debit reform, didn’t know if they had or saw their costs actually rise – not the effect Congress envisioned when it passed debit reform five years ago and not at all what the banks claim.

The same study said reform had helped these small banks and credit unions, something the authors neglect to cite in their op ed: “Since its implementation, the regulation has substantially reduced the interchange revenues to covered issuers, while exempt small issuers have been well protected,” said the Fed.

As a recent op ed here noted, even the credit unions’ own trade publication has reported that their exemption to debit reform has given thrifts a huge opportunity to compete with larger banks.

As for the $8 billion banks have supposedly lost and retailers hoarded, we see in this opinion piece no source cited for this number. Even assuming the figure is correct, the authors don’t tell us how much came from big banks and how much, if any, from the exempt small ones.

In fact, banks are still doing well even after debit reform. Banks continue to rake in an average 500-percent profit margin even as their costs of processing debit transactions have plummeted by almost half, according to their own figures submitted to the Federal Reserve.

Meanwhile, by contrast, retailing is so immensely competitive that merchants have to pass along any savings at all to customers or be clobbered by competitors. If they were hoarding billions of dollars, their financial results would be a lot better than they in fact are. And an economist who studied the first year the law took effect concluded consumers actually saved $6 billion.

So don’t be snowed by the big banks and the small ones that inexplicably continue to carry the big banks’ water on debit reform, despite clear evidence that the small guys actually benefited from reform.

Michael Flagg
Merchants Payments Coalition
Posted by Merchants Payments Coalition | Wednesday, February 24 2016 at 6:01PM ET
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