Monday, July 22, 2024
The Fed was authorized to cap debit interchange for card issuers with assets in excess of $10 billion under the Durbin Amendment to the Dodd-Frank Act. Here's how the proposed change would play out on a $50 debit card transaction: allowable interchange would fall from 24.5 cents to 17.7 cents. The proposal received immediate blowback from the banking industry, as well as merchants(who wanted a lower cap), and even from within the Fed. Fed Governor Michelle Bowman, a former banker and state banking commissioner, complained in a statement for the record that the change would force banks to raise fees, which in turn could disenfranchise lower-income consumers with low-cost accounts that rely on debit cards and don't use checks.
"In 2010, after the post-financial crisis overhaul of bank regulations, lenders warned that they would levy fees on debit cards because of a cap on some card charges – but few ended up doing so because consumers threatened to move their business. Some consumer advocates say this time is no different," the Wall Street Journal article, published on July 5, stated. "Unfortunately, the article misses the facts by conveying a flawed assumption that further limits on debit interchange fees will not have significant impact on consumers," writes Billy Reilly, senior vice president for public affairs at the CBA. Reilly goes on to explain how multiple studies, including those by Federal Reserve itself, have shown how the so-called Durbin Amendment affected prices and access to consumer checking account products. "Let's be frank – the research is clear on what happens and does not happen when government policies cap debit interchange prices. Consumers lose, retailers win, and prices stay the same, or increase," Reilly wrote in a July 18 post to the trade group's website.
Reilly goes on to recount mounting evidence on the effects of capping debit interchange. For example, research by the Fed published in 2017, showed consumer access to free checking accounts declined, while monthly fees rose, as did required average minimum balances. "Our results further show that, depending on their competitive exposure to covered banks, [banks exempt from the regulation] also raised their prices," the 2017 Fed report stated. A 2019 study by Vladimir Mukharlyamov of Georgetown University and Natasha Sarin (a former counselor to Treasury Secretary Janet Yellen) showed how the negative impacts of debit interchange caps were borne most by low- to moderate-income consumers. "We estimate that the share of free checking accounts fell from 61 percent to 28 percent as a result of [the caps]," the researchers wrote. What's more, they wrote, average checking account fees rose from $3.07 to $5.92 a month, and balances needed to avoid these fees rose by 21 percent.
And then there is a study out of the Federal Reserve Bank of Richmond which found the Durbin Amendment did little to lower the prices consumers paid merchants for goods and services. The majority of merchants (75 percent) reported no price changes due to the debit card regulation, while nearly a quarter (23 percent) hiked prices. More recently, research commissioned by CBA and conducted by Nick Bourke, former director of consumer finance at the Pew Charitable Trusts, revealed that the Fed's latest proposed cap would result in consumers paying between $1.3 billion and $2 billion more annually in higher bank account fees, driven by less prevalent "free" checking products and higher minimum balance requirements, Reilly noted.
The bottom line? "To prevent consumers from becoming ‘debanked' through government price fixing that picks winners and losers – leaving low- to moderate-income families behind the [Federal Reserve] Board should withdraw its proposal," Reilly wrote. 
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