Dodd Frank Revisited
May 19, 2017
Tinker to Evers to Chance was the best double play combination in MLB history. The trio was immortalized in a poem, and even earned a tribute by Supreme Court Justice Harry Blackman in Flood v. Kuhn (1972).
President Richard Nixon ‘s comprehensive wage and price controls, President Jimmy Carter’s gas allocation and price controls, and U.S. Senator Dick Durbin’s 2010 amendment to Dodd Frank to fix the price of debit card interchange fees command a less happy reputation in the annals of economic regulation. While the Nixon-Carter capers died-- including mile-long car lines at gasoline stations-- the Durbin Amendment lives on. But it is on the chopping block in the Financial Choice Act of 2017, a bill which passed the House Financial Services Committee 34-26 earlier this month. The bill should be passed by the full House and Senate and signed by the President. Among the chief beneficiaries would be the unbanked priced out of the banking marketplace.
As economists are wont to say, there are no free lunches. Any government interference with the laws of supply and demand comes at a price akin to Newton’s Third Law of Motion: “For every action, there is an equal and opposite reaction.”
The Durbin Amendment caused debit card bank fees to plunged by $14 billion annually according to 2014 Federal Reserve paper. But that plunge provoked an equal and opposite bank reaction.
Banks hiked monthly account maintenance charges (with higher minimum balance requirements to avoid the charges). They hiked insufficient funds fees. They increased inactivity fees. They scaled back debit card rewards programs while adding more rewards to credit cards unburdened by the Durbin Amendment.
Durbin proponents argued that the price controls would leave small banks and credit unions unharmed because of an exemption for institutions with less than $10 billion in assets; and, that retailers and merchants would pass on debit card interchange fee savings to consumers. Six years of experience have discredited the arguments.
The Federal Reserve Bank of Richmond and Phoenix Marketing International both found that retailers are pocketing the savings for themselves at approximately $8 billion annually. As for small banks and credit unions, the Durban Amendment did not exempt them from the costs of its network routing and exclusivity provisions. They require issuers to provide an additional “unaffiliated” payment network to their debit cards—which saddles them with substantial and recurring administrative expenses.
Repealing the Durbin Amendment would not mean a Darwinian debit card interchange fee industry in which all but Tyrannosaurus Rex players are crushed or exploited. The nation’s time-honored antitrust laws take heed of Adam Smith’s observation in Wealth of Nations: “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.”
Thus, the antitrust laws would prohibit any agreement among debit card issuers to fix the price of interchange fees or to conspire, to attempt, or to monopolize the debit card interchange market. As an incentive to private antitrust enforcement, prevailing plaintiffs are entitled to treble damages and attorney’s fees.
History demonstrates the antitrust laws have teeth. In the 1980s, retailers sued credit card networks—primarily Visa and MasterCard—alleging a conspiracy to inflate credit card fees. A federal district court approved a $7.25 billion settlement in the retailers’ class action, but the award was recently overturned by a federal appeals court. A similar lawsuit was settled in 2003, however, and the card networks lost.
Congress should compose the following epitaph for the Durbin Amendment:
“For every regulatory action, there is an equal and opposite reaction which should be appraised before moving forward.”