Where’s the Debit Discount? Durbin Price Controls Fail to Ring Up Savings for Consumers

What's Next In Payments®
4:04 PM EDT December 9th, 2011

From the Electronic Payments Coalition

Executive Summary

For over a decade, as the use of debit and credit cards grew, as did the retail industry’s efforts to lobby for regulations that would lower the cost of accepting debit and credit payments. As a key element of that lobbying campaign, retailers both implicitly and explicitly stated – in testimony, news accounts, and other public statements – that, should the government agree to establish price controls, any retailer savings would be passed along to consumers in the form of lower prices at the point of sale.

On October 1, 2011, retailers began paying less to accept debit cards, due to provisions in the so-called “Durbin amendment” to the Dodd-Frank Wall Street Reform and Consumer Protection Act. This measure, in part, set the price of debit interchange – what merchants pay to accept cards – at 21 cents, plus five basis points ad valorem for fraud losses and “up to” one cent for fraud prevention. [1]  This represented a nearly 50 percent reduction in cost for the retail industry, based on data from the Federal Reserve that found that the average debit interchange price before the Durbin amendment was 44 cents. All told, the retail industry was anticipating an estimated $8 billion a year in additional profit as a result of this measure. [2]

The research presented in the following document sought to identify evidence that retail customers are not seeing any benefit from these price controls. This exercise compared identical baskets of goods before and after the October 1st implementation of the Durbin amendment, through a total of 84 shopping trips at 21 retail locations of four major national retail brands in six diverse U.S. cities. Our field research found no evidence of any savings being passed along to consumers in the form of lower prices as a result of the Durbin amendment price controls. Of the 21 retail locations studied, 16 locations – 76 percent – either raised prices or kept them the same before and after the Durbin amendment went into effect. Just five stores lowered their prices after October 1st. Overall, customers paid an average of 1.7 percent more for the same products after the Fed rule was implemented. [3]

CONCLUSION: There is no evidence that American consumers are benefitting from the Durbin amendment, despite overwhelming evidence that the retail industry is experiencing significant savings.

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[1] Final Federal Reserve rule: http://www.gpo.gov/fdsys/pkg/FR-2011-07-20/pdf/2011-16861.pdf

[2] “The limits, mandated by the Dodd-Frank Act, may cut annual revenue by $8 billion at the biggest U.S. banks, according to data compiled by Bloomberg Government.” (“Debit-Fee ‘Flop’ Leaves Banks Seeking $8 Billion in Revenue,” http://mobile.bloomberg.com/news/2011-11-02/debit-fee-flop-leaves-u-s-banks-looking-for-8-billion-in-lost-revenue)

[3] Please see appendix at the end of this document for full results and price comparisons.

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