Research Casts Doubt on Merchant And Consumer Savings From Durbin Debit Cap

By John Stewart

Evidence emerged this week that the Durbin Amendment may not be cutting debit card acceptance costs for merchants as effectively as its backers intended. Nor has it prompted many merchants to pass on their savings to consumers, according to a paper published in Economic Quarterly, a publication of the Federal Reserve Bank of Richmond.

“By regulating the [debit card] interchange fee, the goal of the Durbin Amendment was to lower merchants’ costs of accepting debit cards and to pass along the cost savings to consumers in terms of reduced retail prices. A few years after the regulation was in place, however, it is unclear how effectively the regulation has fulfilled its intention,” concludes the paper, entitled “The Impact of the Durbin Amendment on Merchants: A Survey Study.”

Durbin was passed into law in 2010 as part of the Dodd-Frank Act, and its interchange limit was implemented in the fall of 2011 by the Federal Reserve. The Fed’s rules capped debit card interchange at roughly 24 cents per transaction. While the law and its implementing regulation cut prevailing interchange rates in half, they applied only to issuers with $10 billion or more in assets, leaving smaller issuers free to collect market interchange.

Despite the deep cut in interchange, most merchants two years later reported results that seemingly confound the expectations of merchant groups that had battled hard to pass the Durbin legislation. According to the results, which appear in the paper published this week, only 8% of the merchants surveyed reported a drop in their debit card acceptance costs, while 25% said these costs had actually increased. Fully 41% said their costs had remained constant, and 26% didn’t know what the impact had been.

As for passing on debit cost savings, just 2% said they had lowered their prices because of the regulation. Fully 75% had kept their prices constant, and 23% had actually raised them.

The results draw on a survey of 420 merchants across 26 segments conducted in late 2013 and January 2014. The Richmond Fed and payments-research firm Javelin Strategy and Research designed and conducted the survey. Merchant segments ranged from relatively low-ticket retailers like fast-food restaurants to high-ticket sellers such as home-furnishings and consumer-electronics stores.

Reacting to the paper’s unexpected results, some merchant backers of Durbin blame what they see as the Fed’s faulty implementation of the law. Merchant trade groups have long argued the Fed set the interchange cap higher than intended by the law, leaving smaller savings for retailers.

“A new study by the Richmond Federal Reserve shows the Fed made mistakes when it tried to implement reforms to make the market for debit-card fees competitive,” says a statement released by the Merchants Payments Coalition on the same day the study’s results were released. The MPC lobbies Congress on interchange matters.

The MPC’s statement quotes Lyle Beckwith, senior vice president of government relations for NACS, the National Association of Convenience Stores, as saying: “The Richmond Fed report should be a wake-up call for the Federal Reserve. Ninety percent of merchants having their fees stay the same or go up makes no sense when Congress recognized that the price-fixed fees were too high already.” NACS is an MPC member.

The Fed in the past has defended its Durbin rate ceiling. It has also set a timetable for periodic review of the ceiling to judge whether any adjustments to it should be made.

For its part, the paper says any number of factors could have accounted for the results, either singly or together. These include the percentage of cards a merchant accepts from non-regulated issuers and its fraction of payments on small-ticket goods, where acceptance costs soared after Durbin as the card networks raised small-ticket interchange to match the new cap. Networks set interchange rates but interchange income is collected by card issuers.

The paper was written by Richmond Fed economist Zhu Wang with co-authors Scarlett Schwartz and Neil Mitchell, both of whom are former Richmond Fed employees.