Where's the Proof that Durbin Failed Consumers?

Have consumers benefited from the Durbin amendment? Unfortunately for opponents of the Dodd-Frank Act provision that capped debit swipe fees, no one is qualified yet to answer that question.

In a number of contributions to these pages in the past month, the very industry representatives who worked to frustrate the amendment's regulatory implementation now howl about the lack of consumer benefit from the fee cap. Putting this chutzpah aside, what do we actually know regarding the impact of the provision authored by Sen. Dick Durbin? The answer is very little, and claims about its ineffectiveness are simply not supported by the facts we do know.

There are two main lines of criticism that have developed in the wake of the Federal Reserve Board's rule implementing the cap. The first is that we haven't seen retail prices drop as a result. This criticism is odd given that the Fed largely neutered the Dodd-Frank amendment, instituting a cap above that favored by merchants. Given that, one would not expect to see a noticeable price drop. Moreover, debit swipe fees are small fees on generally small individual transactions. The concern for merchants about swipe fees is their ubiquity, not individual fee amounts. It's death by a thousand cuts. Accordingly, one wouldn't expect to see noticeable retail price changes resulting from the savings of a few cents per item sold.

The claim of no observable retail price declines also misframes the issue. The question is not whether we've seen prices drop because of Durbin but whether prices are lower than they would be otherwise. It is possible that prices have risen but not as much as they would without Durbin. There's simply no conclusive research on this issue one way or the other.

The best evidence we have is a study by the Federal Reserve Bank of Richmond, which was based on a merchant survey. This study indicates that merchants have not been passing on savings, but it needs to be read with caution given that the survey also reports that a quarter of merchants were surcharging for debit before the Durbin Amendment. This improbable result should raise questions about the reliability of the survey's data more generally.

The second criticism of the Durbin amendment is that it resulted in the disappearance of "free" checking — pushing consumers into alternative financial services — since banks need to make up for the revenue lost to the debit fee cap. The problem with this argument is that it is not supported by evidence. Free checking actually appears to have expanded after Durbin. And even if the availability of free checking had declined, it could be because of factors other than the swipe fee cap.

The main evidence supporting the claim of disappearing free checking was from an unpublished paper that relies on BankRate surveys of the five largest banks and five largest thrifts in the 25 largest markets. The surveys asked these institutions about the terms of two types of generic accounts, not the actual pricing in real accounts. So the BankRate surveys don't tell us what sort of accounts consumers actually have. They are simply not a solid basis for making claims about the disappearance of free checking.

Fortunately, there is a better source available on free checking accounts: the American Bankers Association's annual bank fee survey. This is a scientifically conducted survey about actual account terms. According to the ABA survey at the time the Durbin amendment was adopted, 53% of consumers had free checking. But a subsequent survey released this year indicated a greater percentage of consumers with free checking: 61%.

Of course, none of this tells us anything about whether there was a causal relationship between the Durbin amendment and the extent of free checking. Just because changes happened after Durbin does not mean that Durbin caused the changes. The fee cap wasn't the only change in the consumer banking space in the past few years that affected the economics of deposit accounts. The Fed's 2010 overdraft regulations and private litigation settlements have reduced banks' overdraft revenue, thereby decreasing the revenue stream from deposit account relationships. Likewise, the highly compressed net interest margin spreads that have obtained since 2008 have reduced deposit account revenue streams.

So what do we actually know? Before the Durbin amendment, U.S. merchants paid merchant fees for debit card transactions that were several times those of merchants in other developed countries. And that is still the case after the fee cap. That alone is prima facie evidence that something was very wrong in the payment card market. All of this points to the need to do more on interchange fees, rather than roll back the Durbin amendment.

Adam J. Levitin is a professor of law at Georgetown University.