The House Financial Services Committee recently voted with bipartisan opposition to repeal Durbin Amendment reforms.
Repeal is a terrible idea that benefits no one but the nation’s largest banks and dominant card companies, while harming consumers.
First, before reform, there is no question this was a market with little competition. Visa and Mastercard paid their member banks to block other companies from processing debit transactions for merchants. The number of companies processing these transactions has plummeted from the triple digits to a mere dozen now.
Under reform, there must now be two competitors available to handle transactions, bringing some competition to the market.
Visa and MasterCard also price-fixed the fees their banks charged merchants to handle transactions every time a customer swiped a debit card to pay for an oil change or lunch in a restaurant or buy new shoes.
Reform limits the banks’ ability to price-fix these fees and, for the first time, gives banks an incentive to compete on these fees.
The Philadelphia Federal Reserve, the federal Government Accountability Office and others have studied reform and found that competition has benefitted consumers, merchants, small banks and credit unions, and the economy overall.
It’s also indisputable that reform hasn’t ravaged big banks. According to the figures they report to the Federal Reserve, they’re still getting an average 500 percent profit markup on each transaction. The Fed’s figures show that an average debit transaction costs the bank just over 4 cents to process, but the price-fixing limits allow a charge of 24 cents on average. That huge margin is why the banks still don’t take the incentive to charge anything they want by competing on price – even the regulatory limits are a huge windfall.
In fact, those margins would be the envy of any retailer, whose margins are typically in the single digits on high volume products such as gasoline. Retailers have to figure the cost of these fees, which have become the second-largest operating cost after labor on average, into their prices.
And retailing is so highly competitive that as these fees fall under reform, retailers must lower prices in order to compete.
It’s also indisputable that even banks are benefiting from reform. For instance, all but 100 of the nation’s largest banks are exempt from debit reform. So small banks and credit unions have actually benefitted from reform and gained market share against their large competitors according to Philadelphia Fed figures.
The renewed competition has stirred innovation in other areas, too, such as keeping the banks’ cards safe from theft.
Finally, high card fees hurt consumers through higher prices, even if they don’t use a card. And especially vulnerable, says Harvard Business School Professor Benjamin G. Edelman, who has studied this issue, are poor people who don’t even use cards much.
Don’t let Congress turn back the clock to big bank pay-offs to block competition and renewed price-fixing. Let the free market work, and let all benefit.
