Repeal the Durbin Amendment: Restore the Rule of Law

By Norbert Michel, Heritage Foundation Financial Regulations Expert

Consumers started relying on plastic cards instead of checks to make their purchases back in the 1980s. Almost immediately, retailers started fighting with card network companies and the banks that issue cards.  The problem centered on high credit card fees.

Retailers charged that the card networks – mainly Visa and MasterCard – were conspiring with the large card-issuing banks to keep fees high. The networks and the banks countered that retailers were free to contract with others if they thought the fees were too high, but if they wanted access to the largest customer base, they’d have to pay their fees.

Fortunately for all sides, Congress long ago established the framework for anti-trust law to deal with exactly these types of disputes.  Using excessive market power and colluding to fix prices are very serious charges that demand objective fact-finding.  So it’s good that these disputes are regularly settled in federal court.

Sometimes the process drags on, and invariably one side loses, but the upside of the U.S. approach is that it provides – beforehand – a transparent legal framework and dispute resolution process.

But one particular dispute over credit card fees has dragged on for more than a decade. And it’s still not over because a federal appeals court recently threw out a $7.25 billion settlement in the retailers’ class action lawsuit. (A similar lawsuit was settled in 2003, and the card networks lost). As luck would have it, the industry started changing just about the time the credit-card litigation got under way, and debit cards started to become all the rage.

Debit card transactions surpassed credit card transactions for the first time more than a decade ago, and they’ve pretty much stayed in the lead.  According to the Federal Reserve, the “number of debit card payments increased more than any other payment type from 2009 through 2012.”

During this shift, retailers lodged the same sorts of complaints regarding debit-card fees, so it wouldn’t be too strange to see this battle end up in court too.  In fact, there’s an excellent chance the retailers would already be in court over debit-card interchange fees if not for something called the Durbin Amendment.

The Durbin Amendment – Section 1075 of the Dodd–Frank Wall Street Reform and Consumer Protection Act – required the Federal Reserve Board of Governors to cap the debit card interchange fees that large banks charge.  In other words, the Durbin Amendment settled the debit-card dispute by taking the side of the retail trade associations against large banks.

Congress should never have passed the Durbin Amendment. The legislative body is not designed to adjudicate legal disputes. Of the three branches of the U.S. government, the judicial branch – not Congress – was set up for exactly this purpose.

Congress’s job is to write the laws.  In this area, it did its duty a long time ago—by writing the nation’s anti-trust laws.

The core provisions of U.S. federal anti-trust law are found in the 1890 Sherman Act and the 1914 Clayton Act.  These laws provide the legal framework for resolving anticompetitive price fixing disputes, and they’re the very same laws that are currently guiding the resolution of the credit-card fee litigation.

Retailers may not be happy with litigating their case for a decade, but there is absolutely no reason that the federal courts cannot adjudicate the same type of dispute over debit-card interchange fees.  And that’s exactly where the dispute belongs.

Repealing the Durbin Amendment would partially restore the proper separation of powers between the three branches of the U.S. government.  But, politics being what they are, repeal won’t be easy.

From the beginning, proponents portrayed the Durbin Amendment as consumer-friendly.  Supposedly, capping the debit-card interchange fees large banks charge was going to save retail consumers billions.

It is doubtful, though, that most retail merchants would fight bitterly to have these fees reduced merely to pass on the full reduction to their customers.  Furthermore, debit-card interchange fees only represent one of many types of fees banks charge.  There was never any reason to expect banks to simply kiss billions in revenue (approximately $7 billion) goodbye without trying to make it up somewhere else.

Unsurprisingly, early research suggests that banks have tried to recoup these 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% 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, even though the interchange fee on the typical transaction is now approximately half the pre-Dodd–Frank fee, early evidence suggests that the Durbin Amendment has had “limited and unequal impact” on reducing merchants’ overall cost of accepting debit cards.  The costs of accepting debit cards have not gone down for many merchants; for some, they’ve actually increased.

The Durbin Amendment is terrible public policy.  It’s little more than a giveaway to a special interest group, the retail trade associations.  And it’s a price control, so it is destined to end horribly.

Still, many members of Congress are afraid to repeal Durbin because it caps a fee that large banks charge.  That fear is perfectly understandable, but members should not be in this position in the first place.

Congress did its job many years ago by establishing the legal framework for resolving these types of disputes. The Durbin Amendment ignored that process and made Congress the final judge and jury in an antitrust dispute.

Repealing the Durbin Amendment would be a victory for the rule of law and a remedial action needed to help restore the separation of powers created by the Constitution.

*Originally published on Forbes, click here.

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