Background
The Durbin Amendment, offered by Senator Dick Durbin (D-IL), was enacted in 2010 as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The Amendment established an artificial price cap, determined by the Federal Reserve, on the interchange fees merchants paid for the system that gives them the convenience of accepting debit cards. It also established new network routing requirements for debit cards.
While the interchange fee caps receive more attention, the Durbin Amendment’s network routing provision also functions as a backdoor price control. Like the fee caps, the routing provision is an example of government interference in a well-functioning market, which leads to price distortions that benefit the largest retailers at the expense of community banks, credit unions, and other financial institutions. More importantly, it ultimately hurts consumers and restricts innovation, and is another clear example why the Durbin Amendment must be repealed.
Prior to 2010, credit unions had the freedom to choose which payment networks they wanted on their debit cards. Credit unions could select among competing networks based on the various features they offered, including security, reliability, and other consumer benefits. Credit unions exercised their choice based on what served their members best, and members selected cards based in part on these network features. Importantly, members could be confident that their network choice would be honored by merchants at the checkout counter.
But under the Durbin Amendment, all U.S. debit cards are required to participate in multiple unaffiliated networks. Retailers—not consumers—now dictate which network is used. These routing and exclusivity provisions have harmed consumers, who can no longer choose a debit network that reflects their preferences on payment speed, reliability, and security. Instead, merchants can re-route debit transactions to the lowest-cost network, regardless of its commitment to security. This means consumers may lose access to certain features associated with a debit network, including zero-liability protection or text message alerts. Retailers may save a few pennies on each transaction, but consumers are more exposed to fraud risk while networks have less incentive to invest in innovative data security measures.
Further, many credit unions were told that the Durbin Amendment would not impact their interchange rates because they are exempt from the price controls that only apply to institutions with more than $10 billion in assets. In reality, these so-called “exempt” credit unions have seen a steady erosion of interchange income since 2010 according to Federal Reserve and NAFCU studies. A key reason for this decline is the network routing requirement, which applies to all financial institutions regardless of asset size.