Durbin Amendment Lacks Economic Foundation
WASHINGTON - As Congress contemplates whether to pass a law regulating debit card interchange, a majority of economists and government officials attending a meeting on the subject agreed that there is no economic basis for the proposed regulatory change.
"The literature cannot even tell us whether a cap on debit card interchange will reduce or increase the numbers of debit cards," Todd Zywicki, a professor of law at the George Mason University School of Law told attendees of a June 9 conference on the topic.
"The principle of 'do no harm' would suggest that a more prudent course would be to more closely and rigorously study an issue before making such a decision."
Zywicki is also senior scholar at the Mercatus Center at George Mason University, a free market-oriented nonprofit research institution that sponsored the conference.
Zywicki's comments came after a full morning of sessions where the clear majority of meeting participants openly doubted whether there was a need to regulate debit card interchange at all and expressed opposition to the Durbin amendment, which would regulate debit card interchange, and is sponsored by Sen. Richard Durbin (D-Ill.).
The Durbin amendment should more appropriately be called the Walgreens amendment, Thomas Brown, an adjunct law professor with the University of California Boalt School of Law, asserted. He said that Durbin only drafted the amendment after taking a call from the CEO of Walgreens. Brown is also former senior counsel for VISA Inc.
A spokesman for Durbin denied the accusation. Walgreens has its headquarters in Durbin's home state, and Walgreens President/CEO Gregory Wasson serves on the board of the National Association of Chain Drug Stores, which has been lobbying Congress as part of the Merchant Payments Coalition.
Brown also noted that the Durbin amendment is the latest example of confusing politics and policy "and when in Washington, that's one thing we definitely don't want to do," he said to widespread laughter.
The first panel of the meeting was the only one where at least some of the speakers supported the debit card interchange move. Mike Konczal, a fellow at the liberal Roosevelt Institute, and Felix Salmon, a financial blogger for the Reuters news service, supported the amendment, largely citing the increasing interchange rates as proof that something was wrong with the way interchange is calculated.
"As technology improves and markets mature, prices generally decrease," said Salmon who also serves on the board of directors for the $26 million Lower East Side People's Federal Credit Union. "The fact that interchange rates have been increasing is a signal that something is wrong under the hood," Salmon added.
Salmon also pointed out that he was speaking particularly about the interchange rates for debit card transactions validated with a personal identification number. "Don't get me started on signature debit," Salmon said, calling signature debit transactions "a nonsensical product that shouldn't even exist" at another part of the program.
In an interview with Credit Union Times after the panel concluded, Salmon said that his credit union supported the Durbin amendment. "None of the board members, none of the officers have any problem with the Durbin amendment," he said. "We all support it." He also expressed doubt as to the impact the amendment would have on the credit union's operations or noninterest income.
Konczal attacked the notion that merchants should be so grateful that debit and credit cards exist that they should pay the interchange fees with no questions asked.
Economists opposing the change questioned whether the cost of interchange has been rising and argued that even if it had been, there was no indication of why that might be. Repeated court cases have not found interchange, or how it is set, to be anti-competitive or in need of an anti-trust solution, the opponents pointed out.
Several economists noted that credit and debit card interchange is not the only example of what is called a twosided market?or symbiotic?in the current economy. They noted newspaper readers and advertisers, health maintenance organizations (patients and doctors), and travel reservation services (travelers and airlines).
In these kinds of markets it is customary that one set of customers subsidize the other. Readers benefit from being able to purchase and read their newspapers and magazines at a lower price than if they had to pay the full cost of publishing them themselves. Even if interchange rates have risen, the opponents said, it's still not clear that merchants should not pay for a payment system that directly benefits them.
"In the case of newspapers, it's unclear to me that we should protect advertisers from higher rates if my publication decided to raise rates," said Megan McArdle, a writer and blogger for the Atlantic Monthly who chaired the panel.
Zywicki argued against the contention that interchange rates are too high, contending that such declarations fail to consider the costs of other payment systems that are effectively subsidized.
"Card interchange operates on the principal that the costs for a service should be borne by those who use the service," Zywicki argued. "But merchants pay no direct costs for accepting cash or checks which the banks pay for, or we all pay for."
Zywicki said that it costs the Federal Reserve about $600 million per year just to print currency "and we all pay that." He also argued that the contention that interchange costs are too high fails to consider the indirect costs in time, insurance, risk mitigation and other things that currency carries. He observed that when Metro, the transit authority for the Washington D.C. area, found employees at its parking garages stealing cash, the transit authority's solution was to get rid of cash.
"Now when you want to park at one of their facilities, you have to use a payment card that you purchase with another payment card," he said. "It's perplexing to me that we are doing anything to further the system of having armed men guarding trucks driving around with little slips of paper as a payment system."