False Promise

Former FDIC Chairman Bill Isaac once called Franken Dodd "the worst piece of financial legislation in modern history" and blasted the law's "Durbin amendment," in particular, as "pure and simple, special-interest politics."

I think the Durbin amendment is really a terrible precedent," Isaac says. "It weakens the banking industry at a time when we need it strong, and the folks who supported the Durbin amendment should be ashamed of themselves."

The subsequent cap placed on interchange fees by the FRB in response to Turban Durbin's amendment caused many bankers and credit union executives, and their trade group representatives, to predict that the only result would be to fatten the pockets of retailers at the expense of both financial institutions and their customers. Over five years down the road, that dire prediction appears to have been spot on, according to a recent opinion piece in the American Banker by the CEOs of the ICBA, CUNA, and NAFCU (people who sometimes are at each others throats on bank vs. credit union issues).

The price controls lawmakers were able to impose on those providing electronic payment options have resulted in an $8 billion annual handout to retailers that they have not passed on to consumers. Five years after the Federal Reserve issued a rule to implement the amendment, retailers have kept most of this revenue — an estimated $32 billion — for themselves.

While Congress may have thought this legislation would provide a benefit to consumers, data from a survey of merchants contained in a recent Federal Reserve Bank of Richmond study indicates that the amendment is simply not working as intended. The report found that "few merchants are found to reduce prices or debit restrictions as debit costs decrease." This just reinforces the argument that the Durbin amendment is essentially a merchant handout from Congress.

Consumer research echoes the reality that retailers are not passing on this revenue in the form of savings for customers. In September, Phoenix Marketing International conducted its fourth annual survey of nearly 2,000 consumers and found that the vast majority of shoppers have not experienced a price drop at the point of sale. In fact, in each of the 15 categories measured, at least 92% of shoppers reported that prices rose or stayed the same over the past year.

The authors further assert that the retailers' trade association claims of several years ago that retailers were passing along the savings to customers, and, more recently, that the fee reduction benefited banks and credit unions, as bald-faced lies.

A study released last week by the Credit Union National Association reported estimated reduced revenue of $1.1 billion for credit unions resulting from Dodd-Frank's regulatory costs, all of which the report attributed to the swipe fee provision. Real data in the form of costs of processing changes and declining fees since 2011 debunks claims that credit unions and small banks below $10 billion in assets are not feeling the pinch. Further, there has been a decline in the interchange rate since the price controls went into effect. It continues to remain around 4 or 5 cents below where it was pre-Durbin, according to a survey by the National Association of Federal Credit Unions.

The authors conclude that rather than trying to blow smoke up the nether regions of financial institutions and consumers, perhaps retailers' time would be better spent figuring out ways to pass along the savings on interchange fees to consumers. Don't believe that conclusion any more than you should the retailers' claims. What financial institutions really want is the repeal of the Durban amendment and the Fed's limit on interchange fees. That won't happen in 2016, but perhaps the next Pontifex Maximus of the Disunited States of America can spare a moment from building "the greatest border wall of all time, a wall that will make the Great Wall of China look like Tom Sawyer's picket fence" to promote some Republican-sponsored legislation to benefit community banks and credit unions for a change, instead of the Wal Marts and Home Depots of the world.

Yes, I know: and perhaps pigs will sprout wings.