Neugebauer bill aims to repeal Durbin Amendment

On June 14, Rep. Randy Neugebauer (R-Texas) introduced H.R. 5465, a bill that aims to repeal the Durbin Amendment (Section 1075 of the Dodd-Frank Act). The Durbin Amendment required the Federal Reserve to limit the interchange fee that a card issuer could collect from merchants for debit card transactions.

Under the rule implemented by the Fed in June 2011, the maximum interchange fee that a card issuer could receive was set at 21 cents per transaction and 5 basis points multiplied by the value of the transaction. Not surprisingly, with the drop of multibillion-dollar annual revenues for card issuers, the Durbin Amendment has been popular with retailers and merchants but not so much so with debit card issuers.

“What the Durbin Amendment did do was artificially shift over $30 billion in revenue from one industry to another. Instead of promoting free market principles and technological innovation, such as enhanced data security capabilities, the Durbin Amendment was nothing more than a government action to manipulate the marketplace,” said Neugebauer, who is the chairman of the House Financial Services Subcommittee on Financial Institutions and Consumer Credit.

Neugebauer referred to a study by the Richmond Federal Reserve Bank that had found that since the rule’s implementation, consumers faced higher banking and card service fees as banks tried to make up for the lost interchange revenues.

“Sen. Dick Durbin (D-Ill.) and the retail lobby sold Congress on the need for debit swipe fee reform under the guise that consumers would see significant savings if the government controlled the price of these transactions,” Neugebauer added. “Instead, several studies, including research from the Federal Reserve Bank of Richmond, have definitely shown that consumers have not received any passed-through savings. Some studies have even shown that these price caps have resulted in reduced free checking accounts and higher minimum balances for consumers.

“Further, some small businesses and those with a high volume of small-dollar transactions are actually fairing worse with the price caps in place – a strange twist for the retail industry, which was lobbying so hard for the Durbin Amendment’s adoption,” Neugebauer said.

The bill has received strong support from the American Bankers Association, Consumer Bankers Association, Credit Union National Association, the Financial Services Roundtable, Independent Community Bankers of America and the National Association of Federal Credit Unions.

In a letter addressed to Neugebauer and Rep. Jeb Hensarling (R-Texas), who is chairman of the House Financial Services Committee, the associations claimed that retailers were not using the savings from decreased fees to lower prices but instead were pocketing the more than $36 billion in savings.

“Retailers promised they would pass any savings from the Durbin amendment on to their customers, but almost six years since the amendment was passed, it is clear customers have seen no relief at the register,” the associations wrote. “A recent study by the Federal Reserve Bank of Richmond surveyed a diverse set of merchants and found that more than three-fourths in the sample did not change their prices after the Durbin Amendment was implemented.And, surprisingly, the study also found that one in four merchants actually increased prices since the Durbin Amendment took effect.”

The associations further argued that although the Durbin Amendment meant to exclude smaller card issuers, it offered “no such exemption from the costly and burdensome network routing and exclusivity provisions – a process that involves substantial and recurring administrative costs on top of an already challenging cost environment.”

According to the Financial Services Roundtable (FSR), the Durbin Amendment was added to the Dodd-Frank Act without any hearings or analysis and is a “textbook example of how the government picking industry winners and losers can end up harming consumers.”

“Congress was sold a false promise of lower retail prices, which never happened,” FSR Vice President of Government Affairs for Payments Jason Kratovil said. “This piece of legislation would undo a failed experiment in government price controls and allow everyone in the payments system to get back to further innovating and serving their customers.”

According to a 2014 report from the Federal Reserve Bank of Richmond, which surveyed retailers about prices changes following the Durbin Amendment, “Most respondents (67 percent) reported no change or did not know the change in their overall costs of accepting debit cards post-regulation. Among those who did see a change in debit costs, about three times as many (25 percent over 8 percent) reported a cost increase as those who reported a cost decrease. … The majority of respondents (75 percent) reported no price change due to the regulation. For those who had a price change, 11 times more (23 percent over 2 percent) reported price hikes than cuts.”

That study also discussed factors that could complicate the Durbin Amendment’s intended effects.

For instance, the regulation set a cap on the interchange fee but not on the merchant discount rate, which is the ultimate fee that a merchant has to pay to an acquirer (the financial institution that collects the payment on behalf of the merchant) for accepting the payment. Interchange fees also were different based on the merchant sector (supermarkets, gas stations, retail stores, restaurants and utility firms).

The primary trade association for the retail industry, the National Retail Federation (NRF), citing findings from the Federal Reserve Bank of Kansas City, argued that merchants and consumers still are paying the highest swipe fees in the world on debit and credit cards: “Swipe fees on debit and credit cards are many retailers’ second-largest operating cost, behind labor. Exorbitant swipe fees also mean consumers pay higher prices.”

The NRF added that the Fed previously calculated that 4 cents per transaction was a “reasonable and proportional” fee to the actual cost of processing a transaction and had proposed a cap at 12 cents.

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The Federal Reserve Board, Office of the Comptroller of the Currency and Federal Deposit Insurance Corp. have issued information on the host state loan-to-deposit ratios, which are used to determine compliance under Section 109 of the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994. Review the ratios in Dodd Frank Update’s Library.