Cornerstone Advisors Research Illustrates How Durbin Amendment Negatively Impacted Financial Institutions and Consumers
New research from Cornerstone Advisors, a leading management and technology consultancy for banks, credit unions and fintech firms, reveals how legislation that mandated debit card payment routing and interchange price caps has negatively impacted the nation's banking system and consumers. The study also indicates that newly proposed credit card routing legislation will produce similar negative effects.
The report, titled "The True Impact of Interchange Regulation: How Government Price Controls Increase Consumer Costs and Reduce Security," presents evidence that Sen. Dick Durbin's (D-Ill.) amendment to the Dodd-Frank Wall Street Reform Act did not deliver the intended benefits to small businesses and consumers and in fact, has produced the opposite effect.
The research cites a number of specific examples:
Debit card issuers, including those under the $10 billion asset threshold mandated in the Durbin Amendment, have experienced considerable revenue losses, which in turn led to an increase in the cost of everyday banking services for consumers
Elevated levels of fraud on card-not-present debit transactions are a harbinger for the future and could lead to even higher fraud rates with fragmented payment networks and unequal security investments
According to the study, under the Durbin Amendment most merchants did not pass savings from debit card regulation to consumers. Among more than 1,000 small businesses surveyed for this research, the majority expressed that they will behave similarly under the Credit Card Competition Act introduced by senators Durbin and Roger Marshall (R-Kan.).
The report indicates that in comparison to other payment methods, credit and debit cards are an efficiency gain providing tremendous value for merchants, including cash flow, customer convenience, and minimal risks. According to the report, future interchange reductions for issuers stand to deliver unintended consequences that will be felt in many ways by consumers, such as in increased annual fees and higher interest rates, and in turn, may impact merchants with reduced consumer spending.
"Think of it as regulatory 'whack-a-mole,' where a reduction in revenue from government regulation in one category forces multiple fee-generating categories to rise," said Glenn Grossman, director of research for Cornerstone Advisors and author of the report.
"Debit and credit card price controls harm both consumers and the banking system," Grossman said. "Given their much more limited resources, community financial institutions and the customers they serve will suffer disproportionately from these rules."
Key recommendations presented in the research include holding merchants and networks that process card transactions accountable to a standard for fraud protection and data security, as well as significantly raising the Durbin Amendment's asset threshold tied to debit card price caps.
The research was commissioned by the Credit Union National Association and the American Association of Credit Union Leagues and is available for download here.
More on the toll this takes on credit unions here.