COMMENTARY: To the New Congress: Beware of the Durbin Amendment’s Failures

With the Covid-19 pandemic still imposing a huge financial weight on the nation’s small businesses and families, many legislators are understandably eager to pursue policies they feel will ease that burden. But lawmakers must be careful that they are looking at policies that really will help.

Unfortunately, some sectors—in this case, retail—are using the crisis to push a decade-old agenda that has done, and would do, nothing to help struggling Americans and small businesses. In fact, their agenda could hurt.

A case in point is the Durbin Amendment. A true policymaking blunder, the law’s devastating consequences are still being felt by Americans more than a decade after its passage.

In 2010, retailers promised the Durbin Amendment would save consumers money. To achieve this, the amendment imposed government price controls on debit interchange, even though these interchange fees typically account for only about 2% of an overall purchase. In theory, they said, the interchange caps would allow retailers to reduce their prices and pass those savings along to their customers.

Over the last 10 years, theory has met reality. The Durbin Amendment has resulted in American consumers losing their debit rewards. Due to the interchange caps, financial institutions faced losses [of debit card revenue] estimated at $14 billion just in 2019 and were forced to scale back customer benefits. Also, the prevalence of free checking accounts waned considerably, debit users encountered more frequent—and higher—bank fees, and many popular rewards programs were forced to close.

While harming consumers, the Durbin Amendment resulted in massive windfall gains for the retail industry, especially big-box stores. In fact, since 2011, financial institutions have lost billions in interchange revenue each year, resulting in incredible cost savings for retailers.

But did these retailers reduce prices? Not at all. In fact, the vast majority of retailers (76%) either raised their prices or kept them the same. Rather than provide a boon for consumers, the law created a massive wealth transfer away from everyday Americans and small businesses toward big-box retailers. The Durbin Amendment’s foundational promise – indeed, the entire justification for its passage – turned out to be a complete fabrication.

Merchant-advocacy organizations have been forced to admit that their previous regulation didn’t go according to plan. Customers have not seen their savings materialize, and debit card rewards have waned considerably since the Durbin Amendment’s passage.

Moving forward, the wealth transfer threatens future innovations that would help small businesses and consumers. Interchange fees help fund technology and research development within the payments industry, the kind of innovations that have helped Main Street survive the pandemic.

Over the last year, contactless payments helped customers feel safe and secure, allowing businesses to safely and efficiently pivot to online sales, delivery, and curbside pick-up. Big-box retailers’ profits literally surged while small businesses had to quickly adopt digital payments to get them through state and local shutdowns.

Interchange fees that can respond to market forces could help fund the technology that allows small businesses to better compete with big-box stores.

Additionally, due to the seismic shift to e-commerce, there has been an increase in fraud that leaves consumers vulnerable. Financial institutions use revenues from interchange fees to support new payment innovations like artificial intelligence, biometrics, and tokenization, all of which protect consumers from fraudsters. In other words, interchange fees, appropriately set, could fund the technology that allows merchants to achieve higher sales and lower costs than cash transactions while offering consumers a safer payments system.

These facts have not stopped big-box retailers from actively arguing that Congress should expand interchange caps to credit cards. Congress should not listen to these pleas.

The Durbin Amendment already has failed small businesses and consumers. In all, the policy has cost an estimated $90 billion since its inception a decade ago. Lawmakers should not compound that cost by expanding the policy. 

Big-box retailers aren’t looking to help consumers save money. They are doing well, and want to continue to do well, no matter the harm to their customers and their small competitors.

—Jeff Tassey is chairman of the board of the Electronic Payments Coalition.