Consumers Are Pawns in the Durbin Debate

October 4, 2010

October 4, 2010

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Banks that issue debit cards and businesses that accept them are having a nasty public debate about the Durbin amendment to lower interchange rates. Both are trying to turn this into a consumer issue, which it really isn’t, which has confused the debate.

   The Durbin amendment will cost banks $3.6 billion and $9.1 billion in interchange revenue / year and reduce expenses for retailers by the same amount.  This is a fight between those two parties, and doesn’t involve consumers, except that politicians care about consumers because they vote. 

Why Isn’t It a Consumer Issue?

If retailers get a giant decrease in credit card costs, will they pass it on?  Will banks, who face competition from each other actually start charging for checking accounts en masse?Nobody knows.  In fact, if either party is truly passing on the entirety of the savings (retailers) / revenue (banks) it begs the question – why do they care at all?  If they are passing it all along, it shouldn’t impact their bottom line.It will be very tempting for retailers to use the windfall to pad their bottom lines.  It will also be very tempting for an aggressive bank that wants to expand (especially online banks – ING, Schwab, BankSimple) to keep checking account cheap/free and steal market share from the competitors.Australia mandated an interchange reduction a few years ago and the results were very ambiguous – no increase in consumer’s well being could be measured. 

Is Durbin Good?

Yes.  For three reasons:
  1. When someone pays for something that someone else consumes it leads to inefficient allocation of resources.
  2. Interchange is confusing and there are lots of middle men (banks, credit card processors and visa and mastercard) taking their cut in the middle of the payment stream, which reduces efficiency.  Felix Salmon from Reuters makes this argument very well.
  3. Monopolies tend to abuse their market power.  The banks, acting through Visa and Mastercard have a near-monopoly on the payments infrastructure.   No retailer, not even Wal-Mart, commands the same degree of market power as Visa and Mastercard.  The government should regulate to reduce monopoly power, which in this case means against the bank+Visa+Mastercard.
 Durbin is good because it will reduce economic inefficiency and control an abusive monopoly, it won’t have a big impact on consumers in either direction. Photo courtesy of Alphasix.

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