Why the Harmful Durbin Amendment Has to Go

The Devil’s Tower will no longer be experiencing close encounters – at least of the cash transaction kind. Recently, the Wyoming national monument, known for being heavily featured in Steven Spielberg’s 1977 “Close Encounters of the Third Kind,” announced that it would be going fully cashless. For the National Park Service, this decision is surely the right one. Electronic payments will reduce the park’s administrative burden, bolster security and increase revenues.

In addition to the benefits being reaped by the Park Service and other merchants, electronic and digital banking also have great potential for bringing unbanked and underbanked Americans into the banking system. While banking remains a universal concept, it is, unfortunately, not yet ubiquitous and some legislative barriers need to be removed.

More than 5% of U.S. households do not currently have an account with a credit union or other financial institution, and nearly 18% are “underbanked.” While that may not seem like a lot, that is approximately 16.5 million Americans with no access and almost 59.4 million who have inadequate access to mainstream financial institutions in their communities.

In order to address this problem and provide a solution, it is important to understand why so many Americans find themselves in this position. Recently, the Government Accountability Office (GAO) – an independent and nonpartisan government agency – set out to learn why and review the factors affecting American families’ access to basic banking services. It found the Durbin Amendment ranked as one of the most harmful laws and regulations negatively impacting the availability of fundamental banking services.

The Durbin Amendment allows the Federal Reserve to put an artificial price cap on the interchange fees charged to large retailers every time a customer swipes a debit card. This legislation was enacted in the hope that it would spur economic growth by allowing large retailers to drop their prices – as they would be charged lower interchange fees – thus encouraging customers to spend more. But that hasn’t been the case. Instead, retailers and merchant coalitions are making record profits with the help of digital payments, and very few retailers have actually reduced prices for consumers.

More directly linked to the problem of the unbanked, the Durbin Amendment took critical resources away from smaller financial institutions, like the credit unions and community banks that my company works with every day – and who are, in many cases, the entry point to financial services for unbanked consumers. These financial institutions were forced to offset the interchange revenue losses by raising other fees for consumers (monthly service fees, minimum balance fees, etc.), which affects not only the wallets of their accountholders, but also the success of the overall banking system.

The passage of this 2010 law has restricted the ability of credit unions and community banks to offer less costly resources to customers, and as a result, America’s underbanked population has dramatically increased. According to the GAO, unbanked individuals cite lack of funds, minimum balance requirements, and unpredictable or costly fees as the primary reasons for not having a bank account. As such, additional account fees and requirements – like those associated with interchange regulation – exacerbate the problem of unbanked and underbanked households in these demographic groups.

While the harmful effects of price controls and their impact on businesses, consumers and financial institutions are not new, it has often been difficult to provide direct evidence of the negative impact on financial institutions and their accountholders. However, this nonpartisan GAO report demonstrates how these price controls are directly tied to the reduction of issuer revenue, lack of access to free checking accounts, and higher checking account fees for consumers.

According to the GAO report, the Durbin Amendment caused annual interchange revenue for banks to fall by more than 25%. And in a corollary finding, the GAO stated the interchange cap is closely associated with increased costs of checking accounts and decreased availability of free checking accounts. Moreover, the GAO cited a Federal Reserve study that found that non-interest checking account fees at covered banks rose by 20%, and the average minimum balance required to avoid a fee rose by 50% following the implementation of the Durbin Amendment. Market participants interviewed by GAO auditors also reported that the price cap “limited banks’ ability to offer free checking accounts.”

Making matters worse, some of the largest retailers in the world, like Amazon, Home Depot, Target and Walmart, are urging Congress to expand interchange price controls. These mega-retailers are aiming to use government power, once again, to limit their costs and continue the growth they have achieved amidst the pandemic, while so many small businesses were forced to close. This market intervention would take even more revenue away from the small community banks and credit unions that so many people rely on to financially support themselves and their families.

There is no question that these price controls are hurting everyday Americans. But what can be done to stop it? The answer is simple: It’s time to do away with the Durbin Amendment, let alone permit its expansion to credit. For the last decade, our community businesses, consumers, and financial institutions have suffered from this detrimental piece of legislation. Large retailers cannot continue to profit off the hardships of everyday American businesses and consumers.

Charles E. (“Chuck”) Fagan is president/CEO of the CUSO and integrated financial technology provider PSCU in St. Petersburg, Fla.