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Economic Analysis of Claims in Support of the "Durbin Amendment" to Regulate Debit Card Interchange Fees
By David S. Evans, Howard H. Chang, and Margaret Weichert*
May 12, 2011
Abstract
Section 1075 of the 2010 Dodd-Frank Act requires the Federal Reserve Board to regulate the debit card industry including the interchange fee banks and credit unions receive from merchants. This paper reviews the arguments in support of this regulation put forward by Senator Durbin, who proposed the amendment that led to Section 1075, large retailers, and merchant trade associations.
Contrary to their claims, the leading government entities that have examined interchange fees specifically reject the approach taken by the Durbin Amendment; no US antitrust authority or court has found that MasterCard or Visa have engaged in price fixing with regard to debit interchange fees; debit card interchange fees have not increased materially over time in the US; Canadians have not benefitted from zero debit interchange fees in that country since they pay more for using cards, and retail banking accounts, than Americans and since Canadians cannot use their zero-interchange fee debit cards to pay online or internationally; and consumers and small businesses will not benefit from the planned reductions in interchange fees, in fact they will lose hundreds of millions of dollars a year. Read the full report
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*Evans is Chairman of Global Economics Group, Lecturer at University of Chicago Law School, and Visiting Professor at University College London; Chang is a Principal with Global Economics Group; and Weichert is a Principal at Market Platform Dynamics. The authors would like to thank Visa Inc. for funding the research and writing for this paper. The views expressed in this paper are our own and do not necessarily reflect those of Visa or any organization with which the authors are affiliated.
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http://www.nytimes.com/2010/01/05/your-money/credit-and-debit-cards/05visa.html explains how PIN debit fees used to be 10 cents, before debit card fees went up due to (1) Visa's signature debit push and (2) "competition" between V & MC to RAISE fees sent to banks -- not the usual free market competition that creates a better product at a lower price.
Various laws and V/MC rules prevent stores from rewarding cash purchases by surcharging PIN debit, signature debit, and/or credit cards. Allowing merchants that option is a simple, free-market solution to high swipe fees.
Posted by Bob Schwartz, 23/05/2011 1:21pm (1 year ago)
Eyal's comment that there is no relation between the amount of the transaction and the cost to process it is absolutely incorrect and baseless...fraud losses, one of issuers' largest expenses related to debit, are directly related to the amount of the transaction. A flat 12 cent merchant fee doesn't even begin to put a dent in covering this variable expense.
Posted by Andrew, 19/05/2011 8:14pm (1 year ago)
This whole line of argument that prices should be "reasonable and proportional" to cost is only relevant to publicly-regulated utilities, where the government allows a monopoly in return for price controls. The danger in applying this reasoning to Visa and MasterCard is that it makes people think of them as public utilities, not for-profit companies. Perhaps there is a case to be made for the payment network as public utility (after all, the Federal Reserve processes checks, ACH and wires), but the trend over the last thirty years has been less regulation, not more.
Posted by Aaron McPherson, 18/05/2011 2:06pm (1 year ago)
You forgot one important issue: there is no relation between the amount of the transaction and the cost to process it.... so a percent based interchange for debit has no reason to exist at all.
Posted by Eyal, 18/05/2011 5:47am (1 year ago)
This report makes several important points, particularly regarding the negative impacts the Durbin Amendment will have on consumers; however, I believe it is misleading in its portrayal of the progress of debit card fees over the past ten years, as well as its characterization of the anti-trust issues surrounding Visa and MasterCard.
The large drop in debit card fees documented in 2003 was the direct result of an anti-trust suit brought by the merchants against the card associations, which was settled out of court for $3 billion and an agreement to reduce signature debit interchange by about one-third. While it is true that neither Visa nor MasterCard were convicted of anti-trust violations, the fact that they were willing to settle for such a large amount of damages suggests that their lawyers saw this as a serious possibility. This settlement came in the wake of a major court loss for the card associations against the U.S. Justice Department, which cast doubt on whether the Nabanco ruling (cited in footnotes 14 and 15) would hold up upon review. In addition, both Visa and MasterCard subsequently went public and bought out their bank owners, largely to avoid the anti-trust liability associated with some banks being represented on the boards of both associations. A second anti-trust lawsuit by the merchants, referred to in the paper, has not been thrown out of court despite this change in status, suggesting that the legality of Visa and MasterCard's actions prior to their IPOs is still in question. The authors do a disservice to their readers by ignoring these precedents. Why, just last October, Visa and MasterCard settled with the Justice Department over rules preventing merchants from offering discounts to encourage consumers to use a particular network's cards. Why is this very recent development not analyzed? American Express, also named in the suit, is fighting it on the specific grounds that it does not have the same market power as Visa and MasterCard. Clearly, market power is still an active legal issue.
Using weighted averages to represent debit card fees is also misleading, because it obscures the fact that fees for small merchants have gone up dramatically since the 2003 settlement, as the card networks moved to adopt tiered pricing. A matching reduction in fees charged to large merchants resulted in the overall level of fees remaining roughly constant. It is no accident that the most vocal proponents of the Durbin Amendment continue to be small businesses; they are the ones who have the most to gain from it.
This is not to say that I agree with the decision to use price-fixing as a remedy; to the contrary, I believe it will have just the negative affects the authors claim. However, that is not the same as saying that there are no significant anti-trust issues here that might form a basis for regulation.
Posted by Aaron McPherson, 17/05/2011 2:06pm (1 year ago)
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