COMMENTARY: Congress Could Scrap Debit Pricing Caps—if It Feels Enough Heat

With his eponymous Durbin Amendment, passed into law just over a decade ago, Illinois’s senior senator intended to hurt large banks, along with Visa and Mastercard. The text, however, couldn’t be as expressly punitive as Durbin might have liked. He would likely have preferred capping debit interchange and network acquirer fees at zero or a penny. But that wouldn’t have passed. So the crafty legislator instructed the Fed, charged with implementing the regulation, to get close, without spelling out the number.

Banks lobbied the Fed to defang the bill. The Fed understood losing billions of dollars of interchange revenue, along with severe debit-routing choice, would batter banks already reeling from the financial crisis. So the Fed mitigated the harm by taking an expansive view of what debit-issuer costs could be recouped through interchange, and requiring the least-onerous debit-routing-choice option. 

But the Fed’s job wasn’t to mitigate the damage. It was to implement, not make, policy.

Retailers sued, contending the Fed didn’t faithfully implement the law. In 2013, Judge Richard Leon ruled in their favor, holding the Fed “clearly disregarded Congress’s statutory intent by inappropriately inflating all debit card transaction fees by billions of dollars and failing to provide merchants with multiple unaffiliated networks for each debit card transaction.”

Leon noted “the plain text makes clear that the incremental [authorization, clearing, and settlement] cost of a particular electronic debit transaction is the only cost the Board was expressly authorized to consider in its interchange transaction fee standard.” The Fed appealed, and in 2014, inclined to regulatory deference, the U.S. Court of Appeals for the DC Circuit reversed Leon’s decision. 

Average per-transaction debit-issuer authorization, clearing, and settlement costs, excluding fraud losses, for covered issuers were 3.9 cents per transaction in 2019, roughly 50% lower than in 2009. Yet the Fed hasn’t adjusted its debit-interchange price cap from 21 cents plus 5 basis points plus 1 cent for fraud-prevention-costs. Merchants are torqued. 

In April 2021, North Dakota merchants sued the Fed, charging the debit-interchange cap was too high. Retailers and national debit networks lobbied the Fed, arguing Visa and Mastercard use pricing—along with issuers’, acquirers’, merchants’, and competing networks’ reliance on their technology—to inhibit routing choice.  

Rather than working to repeal interchange price controls, banking giants are trying to persuade the Fed to extend them to large fintechs’ debit card programs. They argue that, because all funds aren’t held in partner, Durbin-exempt bank issuers’ accounts, these fintechs shouldn’t qualify for the exemption, and further that these arrangements are decoupled debit. 

Congress exempted community banks from price controls to advantage them. Enjoying market interchange, fintech partnerships enable community banks to punch above their weight and take share, in a sense fulfilling the legislature’s intent. 

It wouldn’t be unreasonable to require debit issuers to hold the funds to qualify for market interchange. Issuance could be spread over, and benefit, multiple community banks to avoid putting any of them over $10 billion in assets. 

While discussions between regulators and interested parties can be constructive, there’s a problem when it’s hugely worthwhile to lobby the regulator for policy changes. If the Fed were just calling the balls and the strikes, then banks, fintechs, payment networks, and merchants would instead focus their lobbying energies on a politically accountable Congress.

Perversely, while with woke gusto the payments industry is politicizing business, posturing on fighting anthropogenic global-warming and on race-based hiring, contracting, and investing, it hasn’t been willing to wage a full-throated campaign to repeal the Durbin Amendment.  

The industry should make its case in the public arena that interchange caps cause enormous harm, reducing fee-free products and cardholder benefits, and hurting issuer innovation, which in turn hurts consumers (voters). It should pressure Congress to repeal existing price controls and, ideally, politically inoculate the industry against attempts to extend these controls to credit cards.  

There’s a good chance the Durbin Amendment could be repealed with bipartisan support. But whatever their thoughts on price controls, most congressmen would prefer to keep their heads below the parapet to avoid having to take sides between banks and merchants. To do the right thing, the People’s body needs to feel the heat.