May 19, 2017 at 5:00 am ET
Robin Hood took from the rich to give to the poor. A pivotal piece of legislation bearing the imprint of Democrat Richard Durbin suggests the Illinois senator, by contrast, is a fan of “reverse Robin Hood economics” — that is, taking from less fortunate consumers to boost the profit margins of the nation’s largest retail chains.
Self-styled “progressives,” such as Durbin, always stress their compassion for the Average Joe, along with their antipathy toward private companies, who allegedly pay their employees as little as possible while charging their customers the highest prices possible. Most of these progressives, however, actually support terribly regressive economic policies, from high minimum wages to closed union shops to protectionist trade measures.
Each of these policies raises the prices paid by ordinary consumers, reduces overall demand, and consequently reduces jobs and lowers incomes among the very demographic and employment groups they were supposed to benefit. Durbin’s heavy-handed intervention into the world of debit card payments is Exhibit A in the case against such progressive economic regulation.
The so-called Durbin Amendment was an undebated, last minute addition to the ill-considered 2010 Dodd-Frank financial reform bill that passed Congress with the goal of reining-in Big Banks and other financial institutions. Dodd-Frank was the punishment that the political class meted out to the finance industry for its alleged hand in triggering the Great Recession.
The Durbin Amendment placed a cap on the “interchange” fees that financial institutions levy from retailers who accept debit cards. Specifically, the amendment capped fees for banks with assets of $10 billion or more. As of October 2011, the average debit card interchange fee for covered banks was cut from $0.50 to $0.24 per transaction.
As those “high” transaction fees on card use were reduced, progressive economic theory forecast that retailers would naturally lower their prices, as they no longer had to offset these high fees within the prices they charged their customers. Surprisingly, at least for the progressives, the intended consequence of their regulatory intervention did not occur.
On the contrary, the unintended consequence of capped transaction fees has been threefold: first, no reduction in consumer prices; second, an increase in prices in some retail locations; and, third, an increase in retailer profits, as retailers chose not to pass on to their customers the reduction in transaction fees.
Research by Zhu Wang, Scarlett Schwartz, and Neil Mitchell published in the journal Economic Quarterly found that 75 percent of retailers have not reduced prices since the interchange fee cap went into effect. Revealingly, almost one in four retailers have increased their prices since the fee cap was introduced.
There is now considerable empirical data to support the conclusion that capped transaction fees are hurting the very people the Durbin Amendment was designed to help. It is also helping retailers garner larger profits with no benefit to their customers. In a 2014 International Centre for Law and Economics paper on the American experience with price controls on payment card interchange fees, researchers Todd Zywicki, Geoffrey Manne and Julian Morris found that the cap reduced the covered banks’ annual revenues from interchange fees by between $6 billion and $8 billion. Nevertheless, these banks recouped these losses in indirect ways, especially via increased fees on other services and dramatic reductions in free checking services.
The ICLE paper concludes with the “estimate that as a result of the Durbin Amendment, there will be a transfer of $1 billion to $3 billion annually from low-income households to large retailers and their shareholders, which have been the primary beneficiaries of the Durbin Amendment to date.” The bottom line is that the Durbin Amendment “has resulted in a significant transfer of wealth from lower income consumers and small merchants to the shareholders of large corporations.” A recent update of the study finds that “the passage of time has not ameliorated the harm to bank customers from the Durbin Amendment; to the contrary, earlier adverse trends have solidified or worsened.”
The counterproductive nature of the Durbin Amendment suggests a more accurate name would be the Retailers Ripping-off Consumers Amendment. Such is the amendment’s abject, documented failure to achieve its stated goal, immediate repeal is the logical next step. To that end, on April 26 the House Financial Services Committee held a legislative hearing on the “new Choice Act” bill, which includes the full repeal of the Durbin Amendment.
Given the Republican-controlled Congress’ and the Trump administration’s respective calls for an end to onerous and ineffective economic regulation, perhaps common sense and true Robin Hood-style compassion may yet prevail, at least in this policy area.
Patrick Basham is founding director of the Democracy Institute, a politically independent research organization.
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