The Federal Reserve's new proposal to lower the cap on debit card fees will drive up the prices consumers pay for other services, while forcing some banks out of the market entirely, writes Americans for Tax Reform's director of financial policy.
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It has been over a decade since the Durbin Amendment was enacted as a part of the Dodd-Frank Act, but the Federal Reserve is continuing to manipulate Americans' debit cards. The central bank is proposing to adjust debit card interchange fees biennially without future input from stakeholders.
In its current form, the proposal would lower the cap for interchange fees paid to a debit card holder's bank or credit union. The Fed is also arbitrarily proposing to evaluate and "update" the debit interchange fee cap every other year. This fundamentally flawed government-mandated price control is distortionary and will increase costs on other banking products for consumers. It gives the Fed nearly total control of the debit card market. It also augurs continual Fed control over credit cards if the Credit Card Competition Act is enacted.
The Fed is dictating how banks and credit unions can earn revenue to fund their operations. The proposal arbitrarily and impractically excludes consideration of costs such as rewards programs, "card production and delivery costs, marketing costs and research and development costs." In 2022, the Government Accountability Office highlighted several studies that found the enactment of the Durbin Amendment and its implementation via Regulation II increased the cost of checking accounts. There was a significant reduction in the number of free checking accounts after Reg. II was implemented. In fact, the GAO pointed out that "before the implementation of Regulation II, about half of non-interest checking accounts offered by covered banks were free, compared with less than one-third after implementation."
The Fed presumes that debit card transaction volumes will increase if interchange fees decline. The rule surmises that debit card transactions increased after the Durbin Amendment was enacted. It is true that over time consumers' use of debit cards has surged. According to the Fed's own data, in 2021, "[t]he number of non-prepaid debit card payments increased most of all card types." However, the rule fails to make observations about the pandemic, the growth of e-commerce and other factors that pertain to the growing popularity of debit cards.
The proposed rule claims that merchants that see a reduction in interchange fees, "may pass on some or all these savings to consumers in the form of lower prices, foregone future price increases, or improved products or services." This has not been observed in practice. According to one academic study, "[o]utput prices tend to respond faster to input increases than to decreases" in the producer and consumer goods market. The title of the study says it all: "Prices Rise Faster Than They Fall."
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Additionally, in 2014, the Federal Reserve Bank of Richmond published a study showing that after the Durbin Amendment was enacted, about 22% of retailers raised prices on consumers while only 1% lowered prices.
The Fed acknowledges that lower interchange fees may force banks and credit unions to offset costs and limit the availability of certain services. The proposed rule explains that "interchange fee revenue would decline" for banks and credit unions. This government intervention could make banks and credit unions' "checking account and debit card programs less attractive to consumers." The Fed goes so far as to say that the rule could force certain banks and credit unions "to downsize or potentially discontinue their debit card programs." After the Durbin Amendment was enacted, debit card rewards programs were largely eliminated. It is hard to justify lowering debit card interchange fees even more when consumers have already experienced the punitive effects of the Durbin Amendment.
Although banks and credit unions with less than $10 billion in consolidated assets are ostensibly exempt from the debit interchange fee cap, this has not been observed in practice. According to a 2014 survey conducted by scholars at the Mercatus Center, nearly half of small banks reported being affected by the Durbin Amendment with "reported decreases in revenue ranging from seven to thirty percent."
In response to the proposed rule, Rep. Blaine Luetkemeyer, R-Mo., along with thirteen Republicans, introduced a bill that would stop the rule's implementation until the Fed conducts a study of the proposed rule. The study would look at the impact of the rule on consumers, merchants, banks and credit unions, while also observing the quantitative impact on low- and moderate-income communities and small community banks and credit unions. Congress is right to have the Fed conduct and analyze a thorough quantitative impact study before inflicting more harm on American debit card holders.
The Fed needs to reevaluate its approach and ensure that its actions do not irreparably harm the debit card market for years to come. We need less government involvement, not more. So far, the Fed is controlling debit cards like a marionette.
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