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Policymakers in Washington regularly trigger the law of unintended consequences, hurting the very people they profess to help.
A prime example is the Durbin Amendment, a last-minute addition to the Dodd-Frank Act that placed the Federal Reserve in charge of pricing debit-card transactions and established new rules for how those transactions are routed.
This misguided effort to regulate debit-card transactions hurt our members, their customers and consumers more broadly. It even harmed the smallest community financial institutions that were supposed to be exempt from these regulations. All of us agree it should be repealed without delay.
The Durbin Amendment was slipped into a broader financial-market reform bill with very little scrutiny. Its government-imposed price controls on the rates merchants pay to process their customers’ debit-card transactions were supposed to lower costs for consumers. Six years in, studies show the Durbin Amendment actually increased the cost of processing smaller transactions and failed to generate meaningful consumer savings.
Since its enactment, the law has siphoned upwards of $6 billion to $8 billion a year from the revenue banks and credit unions use to serve their customers and members, respectively. The total damage is $42 billion and counting, according to a study by the Federal Reserve Bank of Richmond. Much of that bounty has flowed to big retailers, despite their repeated promises to pass any savings along to their customers.
The Richmond Fed also found that processing lower-dollar transactions like groceries or a fast-food meal rose after the Durbin Amendment became law. Those higher costs hit the smaller merchants who are forced to pay it, or pass it along to their customers.
The Durbin Amendment’s hefty compliance costs also extend to the community banks and credit unions that were supposed to be spared. The rule cost credit unions $1.1 billion in 2014 alone, according to a study on those regulatory costs by Cornerstone Advisors.
The law’s attempt to impose “competition” among card networks instead created added compliance costs and regulatory burdens. This regulation effectively became a price control, lowering interchange revenue for smaller card issuers, all while imposing significant, recurring compliance costs on the lending institutions that can least afford them.
The regulatory burdens imposed by the Durbin Amendment helped accelerate consolidation among the smaller lenders on Main Street, reducing competition and depriving consumers of all the choices that existed before Congress intervened. The total number of credit unions has contracted by more than 20 percent since the passage of financial reform. On average, one credit union merges or closes every business day. Researchers at S&P Global recently reported that lost revenue from the Durbin Amendment is motivating some smaller banks exempt from the law to merge with other institutions. The goal is to offset the lost interchange revenue with higher fee-generating deposits and other assets that earn income.
Our associations collectively represent most of the country’s banks and credit unions, right down to the smallest neighborhood community bank and credit union. Our combined membership includes almost 6,000 member-owned credit unions and nearly 6,000 community banks. We employ more than 2 million people and protect more than $16 trillion in assets. Our member institutions fuel economic growth, so that consumers and businesses have access to the capital and convenient financial services they need.
In the six years since Congress passed the Durbin Amendment, we have gathered ample evidence to prove the law did not meet its stated goal of lowering prices. Instead, it has needlessly imposed added costs on lenders, borrowers and consumers alike.
We are encouraged by efforts in Congress to revisit those parts of the Dodd-Frank financial-market reforms that have not worked as they were intended. The House Financial Services Committee, led by Chairman Jeb Hensarling (R-Texas), displayed leadership when members included a repeal of the Durbin Amendment in the Dodd-Frank overhaul the panel approved last fall.
We applaud Hensarling for again taking a principled stand by keeping a full Durbin Amendment repeal in the new version of the bill he just introduced. We encourage members to follow his lead by supporting this much-needed reform.
B. Dan Berger is president and CEO of the National Association of Federally-Insured Credit Unions; Camden R. Fine is president and CEO of the Independent Community Bankers of America; Richard Hunt is president and CEO of the Consumer Bankers Association; Rob Nichols is president and CEO of the American Bankers Association; Jim Nussle is president and CEO of the Credit Union National Association; Tim Pawlenty is president and CEO of the Financial Services Roundtable; and Molly Wilkinson is executive director of the Electronic Payments Coalition.
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