How the Durbin Amendment Has Failed Banks, Consumers

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The Beltway debate between the retail and financial sectors over the electronic payment system has flared up again. While retailers are lobbying Congress to extend government price controls to credit card interchange rates, separate bills would repeal Durbin Amendment ceilings on debit card interchange and strengthen merchant security standards.

This war of words has many on Capitol Hill ducking for cover. Congressional offices would generally prefer to avoid this politically fraught debate between two ubiquitous constituencies, and they wonder why the interchange issue is returning to the fore now. Here's why: interchange price controls harm consumers and community financial institutions to the benefit of unsatisfied merchants pushing for more. Now is the time to correct our past mistakes and avoid making new ones.

Consumers and Community Banks

Government price controls on debit card interchange fees were supposed to lower prices for customers. But the evidence increasingly shows that retail customers are seeing no monetary benefit of price controls while losing payment options at the point of sale.

A Federal Reserve Bank of Richmond survey of merchants found that 98% said they have either maintained or raised prices since debit interchange controls took effect — hardly a boon for retail consumers. The Electronic Payments Coalition estimates the funding transfer to retailers at $8 billion per year, now totaling some $36 billion since the rules were adopted in October 2011. No wonder a Morning Consult poll found a majority of respondents said they support repealing the Durbin Amendment upon learning merchants are not passing along the savings promised to customers.

Not satisfied with this massive wealth transfer, large retailers are also limiting consumer choice at the point of sale to get an even greater slice of interchange revenues. By requiring their customers to use a PIN at their payment terminals, these large chains are attempting to bypass the network agreements that allow them to use electronic payment technology. Responding to Visa's threats to cut off access to Visa debit cards unless they follow their network agreements, these merchants have howled through their lawyers that doing so would have catastrophic consequences for their business. In other words, merchants want to enjoy the benefits of the payments system without having to pay for it.

Meanwhile, community banks and other local financial institutions that were intended to be exempt from interchange price controls have been negatively affected. As community bankers have long noted, the Durbin Amendment offers no exemption from network routing and exclusivity provisions that require issuers to add an "unaffiliated" payment network to their debit cards, which involves substantial and recurring administrative costs. Meanwhile, as interchange revenues at the largest financial institutions have shrunk due to government intervention, more of the burden for funding the payments system has to be shouldered by the community banks that were supposedly exempted from the law.

As merchants look to extend interchange price controls to credit cards, we cannot ignore the costs of this failed experiment thus far, which is why Reps. Jeb Hensarling and Randy Neugebauer have introduced plans to repeal the Durbin Amendment.

Retail Security Concerns

While working diligently to shape the payments system in their favor, retailers have shown less of a commitment to ensuring its security. There have been 235 data breaches at retailers and other businesses so far this year, nearly half of all U.S. breaches and responsible for nearly 2.5 million compromised records, according to the Identity Theft Resource Center.

Community banks and other financial institutions are required to follow appropriate security oversight established by the Gramm-Leach-Bliley Act, but merchants that process and store consumer financial data are subject to no such standards. Despite their porous approach to customer security, merchants have actively opposed congressional efforts to apply a consistent data security framework across the payments system.

To shore up the weak link in the nation's data security defenses, House and Senate lawmakers have introduced the Data Security Act. The act would require all entities that handle sensitive financial data to implement data security processes like those already mandated for banks, replacing the current patchwork of state data security laws. According to the same Morning Consult poll mentioned above, 90% of respondents support such a policy.

Anyone concerned about the potential impact on small businesses can rest easy — the legislation is scalable and flexible to the size and risk profile of covered businesses. So mom-and-pop shops would not have the same level of scrutiny as multichannel retailers with massive databases of consumer information. Instead, the emphasis would be on the large companies that have allowed massive breaches requiring community banks to reissue tens of millions of credit and debit cards to affected customers.

The lightly regulated retail sector is looking to not only exacerbate the failures of interchange price controls in the name of financial gain, but it dares to do so while continuing to put its customers at needless risk. Rolling back debit interchange price controls while bolstering lax merchant security standards will correct previous policy mistakes while ensuring a safer payments system for American consumers.

Camden R. Fine is president and CEO of the Independent Community Bankers of America.

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Law and regulation Cyber security Dodd-Frank Credit cards Consumer banking