As the House of Representatives prepares for a vote on the CHOICE Act (a financial reform bill), behind the scenes, policymakers are considering the removal of the legislation’s most critical component — a repeal of the Durbin Amendment.
The CHOICE Act without Durbin-repeal is like U2 without Bono. Sure ‘The Edge’ can still jam and all…but what’s the point? A bill purporting to create “opportunity for investors, consumers and entrepreneurs” must address the elephant in the room — the multi-billion dollar drain on investment caused by Durbin’s provisions.
The Durbin Amendment, passed via Dodd-Frank, set government price controls on how much lenders could charge retailers on debit card transactions. Since interchange fees are the mechanism through which banks obtain revenue for processing the transaction, and the inherent risk involved, limiting these fees effectively turned the debit market model upside down. As thousands of years of government price controls have shown us, the results were never going to be pretty.
After altering the debit card model, banks sought other methods of obtaining revenue. As NerdWallet notes:
After the Durbin measure went into effect, fees on deposit accounts increased an average of 3% to 5%. The increases consumers faced included:
- Monthly account maintenance charges (with higher minimum balance requirements to avoid those monthly charges).
- Insufficient-funds fees.
- Inactivity fees.
Banks also cut back on debit card rewards programs. In their place, banks added more rewards to credit cards, which weren’t covered by the Durbin Amendment.
Taken together, the consequences of the Durbin Amendment fall disproportionately on low-income families who find themselves increasingly pushed out of the banking sector due to higher account costs. As the Competitive Enterprise Institute noted:
Millions of households, regardless of income level, have been adversely affected by the Durbin Amendment through higher costs for bank accounts and related services. Most troublingly, this has hit lower-income households the hardest. Hundreds of thousands of low-income households have chosen (or been forced) to exit the banking system, with the result that they face higher costs, difficulty obtaining credit, and complications receiving and making payments.
Additionally, while proponents of this amendment claimed its enactment would cause retailers to lower their prices, this benefit never materialized. The Richmond Fed found:
[M]ore than three-fourths of merchants did not change their prices after the Durbin Amendment was implemented, and 22 percent of merchants actually increased prices. Amazingly, just 1 percent of merchants reduced prices after the Durbin Amendment was implemented.
But the most economically destructive aspect of the Durbin Amendment is its massive redistribution of income from the banking sector to the retail sector. Lenders have missed out on an estimated $42 billion in revenue as a result of this amendment — those are billions of dollars that could’ve been invested in the next Uber, Amazon, or Apple.
Since investment is essential for facilitating economic growth, it is imperative that Congress take on the hard fights to increase lending. With an economy expanding at less than one percent, the need for repealing Dodd-Frank’s financial weapon of mass destruction could hardly be more apparent.
Durbin’s repeal is the front man of the CHOICE Act — don’t kick it out of the band.