Zywicki: Congress Should Reconsider Durbin Amendment

Professor Todd Zywicki warns in an article appearing in The American magazine that the Durbin amendment threatens the nation's global leadership and innovation, and Congress should reconsider this "ill-advised venture into government price setting" before it is too late.

"Attached as a floor amendment at the very last moment to the Senate version of the Dodd-Frank legislation, the Durbin amendment was passed with no hearings and minimal discussion of its likely impact on consumers and the economy," says Zywicki, adding that many of the likely unintended consequences have been identified since then.

Among these unintended consequences are shifting of the cost of interchange revenue losses to the consumer, affecting lower-income consumers most adversely, and the destruction of innovation in the payment card industry, harming both consumers and the economy and promoting reliance on inferior substitutes.

Durbin's Innovation Killer, The American, June 11, 2011. By Todd Zywicki.

"This stifling effect on innovation is heightened by the targeted applicability of the Durbin amendment to only the largest financial institutions. But because large institutions are the driving innovators, the Durbin amendment essentially taxes innovation in the one sector of the banking industry where innovation is most likely to occur. Small financial institutions are in general not the innovative leaders of the banking system.

"On the other end of the scale, the expansive definition of 'debit card' under the Durbin amendment has been interpreted by the Federal Reserve to include any card or similar product that directly debits a consumer’s account. The definition thus would include PayPal, for example, or mobile phone payment or remote payment systems that directly debit a consumer’s account. Unless these payment systems are exempted by some other provision of the Durbin amendment, the stringent price controls would be imposed to them as well. Note that this means, for example, that the cost of building out a new mobile payment system (such as the ability to swipe a cell phone for payment) or remote payment via mobile phone would be an expense for which the price control provisions of the Durbin amendment would not make allowance. At the very least, the arbitrary definition that the Durbin amendment provides for debit cards will promote regulatory arbitrage, as competitors seek to design their products not solely to maximize their economic and technological viability but to gerrymander them out of the Durbin amendment’s net.

"Astonishingly, one apparent goal of the Durbin amendment is to make payment cards relatively more expensive for a consumer to use in comparison to legacy paper-based systems such as cash and checks.

"A second area in which price controls will likely stifle innovation is in fraud control. The Durbin amendment provides that the Federal Reserve 'may' allow for an adjustment for the permitted fees for costs incurred by the issuer in preventing fraud. In the proposed rule-making issued by the Federal Reserve in December, however, the Federal Reserve made no allowance at that time for fraud prevention costs. Moreover, even if the Federal Reserve does decide to permit recovery of costs related to fraud prevention, there remains the vexing question of what costs will be classified as recoverable under the law."