Durbin Amendment Routing Provision Costly to Consumers

Andrew Quinlan,

Once again, politicians in our nation’s capital failed to beat the free market by setting price controls. This should come as no surprise. Historically, government price-setting has never resulted in any tangible benefit for American consumers—the very people it’s intended to help. Anyone who lived through the gas shortages of the 1970s or who heard stories about food rationing from their grandparents can tell you that.

Yet, politicians are still going strong pushing this policy. The latest attempt at price controls is the Durbin Amendment, which was part of the 2010 Dodd-Frank Act, which capped the interchange fees banks charge for processing debit card transactions.

In addition to the interchange price caps, the Durbin Amendment includes a routing provision that works as a back door price cap. This routing provision is another government intervention in the marketplace that causes price distortions to help major retailers at the expense of the consumers of community banks, credit unions, and other providers of financial services. Worst is that the ultimate costs of price controls and regulations like this are borne by consumers, which is precisely why Congress needs to repeal them.

Before passage of the Durbin Amendment in 2010, the issuers of our credit and debit cards negotiated contracts with networks, which offered a variety of features regarding security, reliability, and acceptance rate. A number of networks competed to provide this service to card issuers, and ultimately the consumers using the cards. Consumers were the key decision makers in choosing cards and their affiliated networks. But since the Durbin Amendment, debit card issuers are required to work with multiple unaffiliated networks, and the merchants rather than the consumers are choosing the networks.

Merchants, of course, pick the lowest cost networks, even if this is not in the best interests of consumers. Often, it leads to higher fraud rates on networks that don’t police fraud as effectively, or higher costs to consumers while the savings of the lower cost network are enjoyed by merchants. In many instances, consumers may not even know which network is used. The strong focus on cutting costs lowers the incentive to make improvements in networks, including stronger protections against fraud, that are demanded by many consumers.

This network routing provision is an instance of what economists call anti-competitive “free-riding” behavior.

The requirement of multiple unaffiliated networks for processing debit card transactions, that benefits merchants over consumers, would be like forcing every Ford dealer to also sell General Motors and Chrysler products on their car lots, as well as the dealers of those automakers being required to sell the products of the other two. Just as the three major automakers compete to sell cars to Americans, the debit cards networks should also compete. Since the government mandates free-riding, the benefit falls to major big box retailers against the interests of consumers and running contrary to free market principles.

Since it benefits them, merchants groups make the argument that these government price controls and regulations also benefit consumers by cutting costs, but the evidence suggests otherwise. A study by the Federal Reserve Bank of Richmond shows that the vast majority of any savings resulting from lower interchange fees charged to retailers has not been passed onto consumers in the form of lower prices charged by retailers. Consumers have enjoyed no savings at the cash register and instead have been harmed by lower network quality and less emphasis on network security.

Given the billions saved in the lower interchange fees, it is perfectly understandable that lobbyists for merchants would ask Congress to keep the Durbin Amendment in place. Many politicians, who may still believe this somehow benefits consumers, will be quick to agree. However, the reality is the network routing provision is a backdoor price control, on top of the price control on interchange fees, that interferes with the smooth functioning of the market, and which ultimately imposes an unnecessary cost paid by consumers.

Price controls never work. No politician or government bureaucrat can set prices more effectively than the free market can. The best that Congress can do for consumers is to repeal the Durbin Amendment, and all of its price control provisions, and allow the free market to work for American families.