No Allowance

May 18, 2011

One part of the Dodd-Frank Act that has nothing to do with its intended purpose—reforming regulatory agencies, establishing restraints to prevent future economic calamities, and protecting consumers—is the Durbin Amendment. This amendment required the Federal Reserve Bank to study the issue of debit card interchange rates and to set a rate by evaluating only the direct costs of processing transactions. The Durbin Amendment, offered by Sen. Dick Durbin, D-Ill., was passed so late in the maneuverings of the Dodd-Frank Act that there was no debate on the amendment’s merits or unanticipated consequences.

There are indeed unanticipated consequences. The banking industry has been aware of numerous unanticipated consequences for years; others are now beginning to understand them. The banking industry has been united in our efforts to correct some of the more egregious aspects of the Durbin Amendment.

Among the many problems with the amendment—well-documented by both the national and state bankers associations—stands a fundamental policy question. Should the government be setting prices that the marketplace has and continues to set efficiently? If so, what comes next? Should government set the price for a loaf of bread, a haircut, or the interchange between a car dealer and a car manufacturer? Do we the people want this kind of governmental interference in our free market capitalistic society?

Another problem: The Federal Reserve Bank, in setting the price, was unduly limited to the direct costs of offering this service. There is no allowance for the many underlying expenses, such as creating or maintaining the electronic highway on which these transactions travel; fraudulent transactions that banks end up paying for; fraud prevention and detection systems that all banks maintain; account procurement; plastics generation; etc. And obviously there is no allowance for a reasonable profit.

Fortunately, head bank regulators from the Federal Reserve Bank, the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency have unanimously testified before Congress that the Durbin Amendment poses a serious problem for banks and their profitability. Even with a carve-out written into the law for banks under $10 billion in assets, all of the regulators above agree that this amendment is not workable in a free market system.

We appreciate the confluence of opinion that the Durbin Amendment is not realistic. Furthermore we urge Congress to pass bills that have been introduced in both the House and the Senate that will delay implementation and will require the Federal Reserve Bank to conduct a study that includes all costs associated with debit card transactions and processing.
– S. Joe DeHaven


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