Congress Should Repeal the Durbin Amendment Because It Is a Price Control
By Norbert Michel, Heritage Foundation Financial Regulations Expert
Business owners expect conservative members of Congress to protect them from the federal government. They particularly rely on conservatives for protection against government price controls.
No self-respecting business owner wants the federal government telling him what price he can charge. Business owners – not federal bureaucrats – best understand what prices they need to charge to earn a living and to make their investments worthwhile.
This view is the polar opposite of the progressives in Washington that want to run peoples’ lives.
Yet, surprisingly, the Republican-controlled Congress is seemingly afraid to bring a bill to the floor for fear of repealing a price control.
The House is on the brink of passing major financial regulatory reforms via Chairman Jeb Hensarling’s (R-Texas) Financial CHOICE Act, but some Republican members are gumming up the works because they’re afraid to repeal the Durbin Amendment.
The Durbin Amendment is a federal price control on debit-card swipe fees. It should never have been enacted. Price controls invariably harm more people than they help.
Retail trade associations are spinning repeal of the Durbin Amendment, Section 1075 of Dodd-Frank, as a win for big banks, but they’re lobbyists. They always advocate for their clients.
This statement is complete nonsense.
Imagine that an entrepreneur is contemplating whether to start a new debit-card network. Then the federal government comes along and mandates that he cannot charge more than a certain price for processing transactions.
Not satisfied, the government goes even further and mandates that every time he offers to process a transaction, he must also offer to let a competitor do the processing instead.
The Durbin Amendment does both. It caps the price the entrepreneur can charge, and it mandates that he provide processing options on at least two networks.
The Durbin Amendment does not encourage competition among card providers – it does the exact opposite because it makes it less profitable to process transactions.
The notion that the market was functioning improperly is also baloney.
It’s true that large retailers considered the fees they were paying prior to Durbin too high. But high prices, even objectively measured, are not sufficient evidence that a market is functioning improperly.
They could even provide a critical signal to entrepreneurs to invest more resources into processing debit transactions. In this sense, rising prices are actually the lifeblood of innovation and competition.
Price caps kill both, so they leave consumers with fewer options. Ultimately, the only providers of services in such heavily controlled markets would be the government or government-protected companies.
Proponents of Durbin have also claimed that the market is functioning improperly because Visa and MasterCard have a duopoly, one that gives them excessive market power (the ability to charge high prices).
One problem with this argument is that there were 15 card networks prior to Durbin. The fact that Visa and MasterCard process the majority of the transactions does not constitute a duopoly. Even if it did, a duopoly would not, by itself, indicate the market was functioning improperly.
It is also indisputable that the parties in this market negotiated their debit interchange fees prior to Durbin, and that banks and network companies charged very different prices to different customers.
For the sake of argument, if there were actually collusion and price fixing among a card-network-large-bank duopoly, the large retailers would have a legitimate complaint. But they’d also have a very straightforward remedy in court. Thanks to Congress, collusion and price fixing in this context would be illegal, and a federal court would decide if the law had been broken.
Either way, Congress should have never inserted itself in this dispute by enacting the Durbin Amendment.
Compounding that mistake, a Republican-controlled Congress is now going out of its way to protect a price control hatched by a liberal senator from Illinois. This fact alone is enough to question the cosmic balance of the universe.
Add in the evidence on the effect that the Durbin Amendment has had so far, and one has to question the wisdom of anyone that supports this debacle, regardless of party. The evidence to date shows exactly what any knowledgeable (of the issue) economist would predict: large retailers have gained profits at the expense of everyone else.
Banks have lost billions in fee income from this price control, but banks charge fees for all sorts of services. Naturally, they’ve tried to recoup those losses in several ways. For instance, banks have:
(1) Reduced the availability of fee-free current accounts. The total number of banks offering free current accounts fell by 50 percent between 2009 and 2013. In comparison, fee-free banking actually increased at banks not subject to the Durbin Amendment.
(2) More than doubled the minimum monthly holding required on fee-free current accounts between 2009 and 2012, from around $250 to over $750.
(3) Doubled average monthly fees on (non-free) current accounts between 2009 and 2013, from around $6 to more than $12.
Furthermore, hardly any merchants have passed on any savings from this price control to their customers. (It defies logic that retailers would simply pass on all their cost savings to consumers.)
Researchers at the Richmond Federal Reserve found that only 1.2 percent of merchants reduced consumer prices, more than 75 percent left prices unchanged, and that 21.6 percent actually increased their prices.
They also found that only 11 percent of merchants reported reduced interchange costs, but that three times as many reported increased costs. Separately, they found that Durbin increased costs for 66 percent of fast food restaurants and 54 percent of grocery stores.
These findings are hardly surprising because smaller merchants, as well as those that rely mainly on small-ticket purchases, regularly negotiated discounted interchange fees prior to Durbin.
It stands to reason that these higher costs disproportionately burden the poor and middle class. Still, from all angles, the Durbin Amendment is a terrible public policy. It is little more than a naked giveaway to a special-interest group: large retailers via their trade associations. And it is a price control, so it is destined to end horribly.
It makes no sense for defenders of free enterprise to shy away from doing the right thing by repealing the Durbin Amendment.
*Originally published in Forbes, click here.