Durbin Amendment Helps Retailers, Not Consumers
"Rent-seeking" is a widely recognized economics term that refers to when people or groups try to obtain economic benefits for themselves through a subsidy in the political arena. In Washington, the term has special significance. Special-interest groups regularly try to gain subsidies by securing a special regulation that disadvantages competitors.
In 2010, the powerful retail lobby went "rent-seeking" and found its champion in Sen. Dick Durbin, D. Ill. His debit interchange fee provision inserted in the Dodd-Frank Act has resulted in the successful transfer of more than $35 billion from one sector of the economy to another. The Durbin amendment, as it has come to be called, mandated that the Federal Reserve cap the "swipe fees" that banks charge retailers for the service of processing electronic payments.
These fees go toward maintaining and improving the electronic payment system. Fees can also be used to provide a safety net for consumers impacted by fraud and fund rewards programs for consumers. By winning in the political arena, the retail lobby successfully decreased its operating costs through government price-fixing. In turn, banks and payment networks saw an artificial price cap placed on the services they provide.
The biggest loser in this situation? American consumers, who were used as pawns by the retail lobby to achieve a self-serving objective.
I recently introduced legislation to repeal the Durbin amendment, which has caused a frenzy of lobbying activity by the retail community committed to protecting its bottom line. Debate over the Dodd-Frank provision has been reignited, but the arguments remain the same. Unfortunately for Sen. Durbin and the retailers, their political gains evaporate as one begins to judge the amendment's performance against the retail industry's promises.
One of the key promises from backers of the Durbin amendment was that consumers would reap the savings in the form of lower retail prices. Douglas Kantor, outside counsel for the Merchants Payments Coalition, testified before Congress in 2010, "There's no doubt the majority of ... [the savings from the Durbin amendment] would go through in consumer savings." This statement proved misleading at best. An independent study from the Federal Reserve Bank of Richmond has shown that when merchants' debit costs decrease, few merchants reduce product prices to consumers.
Even as the Federal Reserve Board was writing the regulation to implement the amendment in 2010, then-Democratic House Financial Services Committee Chairman Barney Frank said, "Unfortunately the evidence we have seen" where fee limits were already in place "is that consumers do not get any benefit from this."
One plausible explanation for why cost savings have not been passed on could be that retailers have instead invested in improving their payment security systems. However, once again, experience shows us this is not the case. In 2013, Target and Home Depot suffered major data breaches affecting more than 100 million consumers. Recently, Wendy's announced a major data breach that affected more than 1,000 stores. Even more troubling, retailers have been slow to transition to more secure payment terminals, with less than 50% of retailers in the United States equipped to accept more secure EMV chip cards.
Another common argument the retail lobby used to advocate for the Durbin amendment was that small businesses would see a dramatic reduction in costs. Unfortunately, that has not been the outcome. Since the amendment went into effect, small retailers with a high volume of small-dollar transactions are now paying more in debit swipe fees under the Durbin amendment than they paid previously. Gone are the discounts on swipe fees that payment networks used to provide in their contracts with small retailers. Those negotiated discounts have been replaced by stringent, one-size-fits-all pricing, showing that taking away the freedom to contract cuts both ways. Absurdly, retail lobbyists, such as the National Retail Federation, continue toadvocate for the Durbin amendment while acknowledging this reality.
While consumers wait for the promised cost savings to come their way, what they have received is an adverse impact on their options for banking services. According to separate studies from Harvard University and the Mercatus Center at George Mason University, banking services have become more expensive and less accessible post-Durbin amendment. For many consumers, this means minimum account balances and account fees have increased while bank rewards have decreased. The very consumers the amendment was intended to help are losing at both ends of the transaction.
As the debate in Congress continues over legislative efforts to repeal the Durbin amendment, advocacy from the retail community should be judged against past promises. Unfortunately, the retailers overpromised and underdelivered. In this classic case of Washington "rent-seeking," retailers wound up the winners, and American consumers and the integrity of the payment system wound up the losers.
Rep. Randy Neugebauer, R-Texas, is chairman of the House Financial Institutions and Consumer Credit Subcommittee.