How Expanding the Durbin Amendment Would Further Harm Community Banks and Their Customers

By Deborah Matthews Phillips

March 07, 2022

With the Federal Reserve Board proposing to reopen Durbin Amendment regulations governing debit card interchange and merchants pushing to extend price controls to the credit card market, interchange promises to be a hot-button issue in 2022.

As the debate proceeds, ICBA is reminding policymakers that the Durbin Amendment has distorted the debit card and consumer checking markets to the detriment of community banks and consumers nationwide.

Customers Worse Off

The Durbin Amendment imposed artificial price controls on the interchange fees merchants pay to use debit card networks, with the idea that merchants would pass their savings on to customers. Unsurprisingly, this market intervention hasn’t worked out as intended.

Researchers at the University of Chicago examined whether merchants passed savings to consumers in the form of lower prices and better services—and they concluded that consumers ended up worse than before. Merchants have retained most of their savings for themselves, with the lion’s share accruing to the nation’s largest retailers.

Meanwhile, those large merchants have not passed on any savings to consumers to date. The result of the Durbin Amendment hasn’t been a reduction in consumer prices—it has been a wealth transfer from community financial institutions to “big box” and large ecommerce retailers.

U.S. small businesses have also been harmed by the Durbin Amendment. According to research from the Federal Reserve Bank of Richmond, merchants who specialize in small-ticket items are nine times more likely to have encountered an increase in interchange cost than a decline.

Unintended Consequences

A provision of the Durbin Amendment that transferred routing decisions from banks and consumers to merchants illustrates the policy’s unintended consequences.

Because large merchants have direct connections to the payments networks, unlike smaller retailers, they can and do negotiate with the debit networks for more favorable rates and fees. Industry experts estimate that a threshold of about $3 billion in annual card sales is required to get a seat at the negotiating table—a process that is neither transparent nor competitive.

Allowing merchants to control debit routing at the point of sale dilutes issuer assurances to customers that their bank protects access to their account. Suddenly, banks have little or no control over the routing they have carefully chosen based on their organization’s and customer’s needs. 

Further, the practice increases community bank costs by raising fees to access debit card networks while artificially lowering interchange rates.

If additional transactions are included in these rules—such as online purchases—community banks will again be disadvantaged while “big box” and large ecommerce merchants benefit.

The Bottom Line for Policymakers

As policymakers consider expanding the Durbin Amendment, community banks must be heard. Here are the facts community bankers can share with members of Congress to illustrate the impact of this harmful policy.

  • Consumers are harmed by the Durbin Amendment by paying higher prices and transferring wealth to “big box” merchants.
  • While the Durbin Amendment “exempted” small institutions, Federal Reserve data clearly shows it has harmed community banks.
  • Card issuers eliminated debit rewards for consumers due to the negative financial impact of interchange fee caps.
  • Imposing these policies on credit cards would undermine competition and innovation to the detriment of consumers who use these payment services.

While “big box” merchants continue pressing to expand interchange price controls to boost their profits, policymakers must be reminded that the Durbin Amendment has been a costly and harmful policy for community banks and the consumers they serve.