The Durbin Amendment, Two-Sided Markets, and Wealth Transfers: An Examination of Unintended Consequences Three Years Later

Abstract

The Durbin Amendment had three major goals. First, to relieve merchants from high interchange fees, which would, in turn, enable merchants to pass these cost savings on to consumers, who would see lower retail prices. Second, to increase transparency in the way in which interchange fees are set. Third, to increase competition among networks, such as Visa and MasterCard. More concisely, the goal of the Durbin Amendment was to transfer wealth from the Issuing banks to the merchants with the hope that it will result in lower prices for consumers through lower fees to merchants.This Paper seeks to shed light both on the efficacy of the Durbin Amendment in achieving its goals and its unintended consequences. Part I provides a background of the debit card industry, examining how the industry is structured, how it works, and it’s rapid growth leading up to the Durbin Amendment’s passage. Part II delves into the Durbin Amendment, analyzing its goals, what it does, and what it does not do (its exemptions). Part III turns to the criticism levied at the Durbin Amendment and provides several hypotheses regarding what economists expected to observe post-Durbin Amendment, including: a lack of regulation’s prerequisite of a market failure; two-sided markets; and the constitution takings challenge to the Durbin Amendment. Part IV turns to the effects of the Durbin Amendment, examining its effect on all five participants in the debit-card market: banks, merchants, networks, payment processors, and consumers. Part IV also provides data regarding interchange regulation in other countries, focusing specifically on Australia and Canada. Part V vindicates TCF National Bank’s constitutional challenge by showing how the confiscatory rate set by the Durbin Amendment (or, more precisely, by the Fed) incentivized new players to enter the fray. The major winner has been prepaid cards, whose market penetration has more than doubled since the Durbin Amendment’s enactment. More specifically, the major benefactors have been nonbanks and three-party prepaid issuers who have issued prepaid cards, as both parties remain beyond the Durbin Amendment’s regulatory purview, allowing them to provide more services and to earn non-capped inter-change fees. Additionally, the other major benefactors how been the entrants into new payment systems, including Square, Isis, Google Wallet, PayPal (although not new), and American Express’s Serve.Updated draft (not completed) to include discussion of recent discussion of DC District Court decision in NACS et al v. Board of Governors of the Federal Reserve System.