Dissecting Durbin

Who’da thunk? Turns out that Chase CEO Jamie Dimon and I have a lot in common. He’s a rich, successful executive IRL (in real life), and I’m a rich, successful executive IRL (in a reality lapse).

We also both think that the Durbin Amendment is IRL (idiotic, ridiculous, and lethiferous).

In his letter to shareholders, Dimon blasted the amendment. Not to be outdone, Durbin wrote back. No point in posting Durbin’s letter here, you can read it on Pymnts.com. But I will address some of Durbin’s comments.

Durbin: “Your industry is used to getting its way with many members of Congress and with your regulators, and my amendment and the Federal Reserve’s draft regulations were not written the way you wanted.”

My take: Nonsense. If the financial services industry was “used to getting its way” with Congress and regulators, there would be no regulations or regulators. Even if there was a kernel of truth to that statement, that’s hardly a basis for enacting new legislation.

Durbin: “Interchange reform will carefully but firmly rein in the fee collusion that your bank and thousands of other banks currently engage in through Visa and MasterCard.”

My take: Carefully? How is your proposal “careful,” Mr. Durbin? The unintended consequences (i.e., rate hikes on checking accounts) weren’t really that hard to foresee. In addition, perhaps you’ve heard of the saying “two wrongs don’t make a right”? If indeed there was “fee collusion,” then your amendment is only replacing that collusion with another form of collusion — price fixing by the government.

Durbin: “Visa and MasterCard have incentive to constantly increase interchange rates and there is no countervailing market force to temper these fee increases.”

My take: Completely untrue. The countervailing market force is the presence of alternative forms of payment. You’ve heard of cash, checks, and credit cards, Mr. Durbin? If a retailer doesn’t want to pay a debit card interchange fee they can refuse to take debit cards. If the debit interchange has been “harmful to consumers” (your words, Mr. Durbin, not mine), then they are (and have been) free to use other forms of payment. The reality of the situation is that consumers have found debit cards to be more convenient than other forms of payment. If there is a “cost” to convenience, then so be it. Every other industry also charges for providing added convenience.

Durbin: “[Debit interchange]  fees end up getting passed on to consumers in the form of higher retail prices for groceries and gas. “

My take: Something you and I can agree on, Mr. Durbin! However… every cost that a firm incurs is passed on. So if you really want to do something for consumers, then reduce taxes and the costs of government and regulations that retailers and merchants pay out.. and that get passed on to consumers as well as the interchange fees. What you CONTINUE to fail to recognize or admit to, Mr. Durbin, is that an interchange fee is not some random tax or fee arbitrarily assessed on merchants. It’s a fee that represents a SERVICE that’s being provided — a service that assumes the risk of fraud/non-payment and a service that effectively and efficiently moves money between accounts.

BOTTOM LINE: The Durbin Amendment is little more than a blatantly political act to extract revenge on the perceived Bad Guy. It’s McCarthyism for the 21st century.

The irony of the situation is that, while this is really about FIs vs. Merchants, and not FIs vs. Consumers, in the end, politics really will make strange bedfellows.

A lower interchange rate will incent  merchants and retailers to take debit cards more often than credit cards or checks. And an increased use in debit cards among consumers will give merchants and retailers better information to target their marketing efforts through FIs’ online banking platforms. 

Which holds the potential to increase merchants’ marketing effectiveness (and efficiency), and produce additional revenue for FIs through revenue sharing arrangements. And consumers will benefit because they will get discounts on the products and services they purchase.

None of this upside is part of  Durbin’s vision for regulatory change. And no one should be the least bit surprised about that. 

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