On November 6, PYMNTS.com gathered experts in the fields of payments and economics in Washington, D.C. for a passionate debate of all things Durbin at an event entitled The Durbin Amendment & The Regulation of the Debit Card Industry.
Participants drawn from government, the payments industry, retailers, lawyers, academics and other stakeholders gathered at a packed room at The National Press Club to witness experts dissect the Durbin Amendment.
This was anything but a quiet event. Five panels were asked to discuss what we’ve learned since the implementation of the Durbin Amendment and dish on its most controversial topics, including how the legislation impacts competition and innovation and whether the Fed overstepped its boundaries with its interpretation of the statute.
Amid the controversy, one thing, as David S. Evans said, is clear: “Two years into the Fed’s regulation, Judge Leon’s decision two months ago reopened a can of worms.”
It all amounted to eight hours of heated arguments between panelists and audience members, humorous duels and vivacious debate. We recap what happened at each of the five panels below.
The Durbin Amendment: The First Two Years
What have we leaned since the implementation of the Durbin Amendment? Moderator Karen Webster asked Philip Bartz, partner at Bryan Cave LLP; Mallory Duncan, SVP and General Counsel at the National Retail Federation; Margaret Weichert, National Lead Payments at EY Advisory; and Doug Kantor, Partner at Steptoe and Johnson.
The first panel of the day kicked off with immediate fireworks, making clear that the effects of the Durbin legislation are muddled, controversial and perhaps not yet realized. A study released by the NRF showed, according to Duncan, that Durbin has brought significant savings both to merchants and customers, an effect he described as “gratifying.”
Batz disagreed. The effect of Durbin, he said, was that “large banks lost, consumers lost, especially less affluent consumers.” The big winner? “Big merchants. Everybody else got nothing,” Batz said.
Among the most controversial aspects of the legislation is its section on routing transactions. As moderator David S. Evans explained, Judge Leon ruled that the Fed had made the wrong decision in how merchants can choose between network options for PIN- and signature-authorizations for each card.
In the second panel of the day, Thomas Brown, a partner in the Litigation Department of Paul Hastings; Gloria Colgan, Managing Director of Market Platform Dynamics; and Reed Luhtanen, Sr. Director of Payments Strategy at Walmart, dove into the effects of either plan and whether the market can feasibly implement the second plan.
According to Colgan, the legislation presents a technical issue of how a transaction is communicated with the merchant in a physical way and how that data is stored. “It’s pushing on an entirely new infrastructure” in how such communication is completed, she said.
Reinventing the Business Model
The issue of interchange fee regulation for debit cards is undeniably a complex and controversial issue. But, as Market Platform Dynamics (MPD) CEO Karen Webster asked, is it time to abandon such efforts to regulate interchange fees and instead move to a completely new business model of payments?
Panelists Andy Freedman, CEO of A. Harris Ventures; Paul Purcell, Co-founder of Continental Advisors; Tim Attinger, head of strategy, corporate development and digital innovation at Blackhawk Network; and Joe Randazza, founder of National Payment Card Association weighed in for the third panel of the day.
Fueling the divide was Attinger, who said that debit cards are now just one part of a payments game that includes finding customers, driving them into merchant interactions and ensuring they return. In such a big playing field. “interchange looks ridiculously cheap,” he said.
In that regard, Attinger said Durbin has been great for Blackhawk, which sees prepaid debit cards becoming mainstream for consumers as a direct effect of Durbin. Purcell, however, slammed Durbin as an example of regulators getting heavy-handed in an area that is now outdated, leading to major disruptions in markets that stifle innovation.
Randazza agreed that Durbin may be focusing on an outdated business model within payments. “Innovation is coming” in the payments sector, he said, “and I don’t think it will find the Durbin Amendment.” Freeman similarly put Durbin into perspective, disagreeing with the idea that the legislation harms innovation. “I take issue with the idea that innovation is being stifled by Durbin,” he said. “I think it’s happening, just outside of this conversation.”
Constitutional and Administrative Law Issues
Spearheading the legal issue of the Durbin Amendment was moderator David S. Evans, but he was joined by a panel comprised of David Balto, founder of the Law Office of David Balto; Richard Epstein, New York University professor of law; and Bob Litan, Director of Research at Bloomberg Government, who addressed the uncertainties of whether Durbin is constitutional and how much deference the courts that ultimately decide the outcome of the Durbin amendment should give to the Fed.
Among the most controversial topics addressed by the panel was whether or not the Fed acted outside of its realm of expertise. Litan theorized that Judge Leon probably believes that the statute incorrectly made the Fed a price regulator. Balto agreed, explaining that the Fed manipulated the law’s language. “That’s not Kosher to a Republican jurist who wants to make sure agencies don’t start regulating on their own,” he said.
Among the most difficult topics the panel addressed was the interpretation of the law’s language – most notably in the Durbin amendment’s text that says the Fed is to establish interchange fees that are “reasonable and proportionate” to cost. The Fed’s odds of winning: not so good according to Epstein and Balto, and much better than even according to Litan. The odds of a resolution before 2016—and maybe even into the 2020s if the Fed doesn’t secure a win in the D.C. Circuit—pretty much nil..
The Regulation of Interchange Fees
Closing out the evening was moderator Scott Schuh, director of consumer payments research at the Boston Reserve Bank, who asked panelists to elaborate on what we’ve learned from economic theory and the result of Durbin as to whether interchange fees should be regulated.
Dissecting the economics literature was David S. Evans, Chairman of Global Economics Group; Todd Zywicki, foundation professor of law at George Mason University Law School; and Bob Chakravorti, managing director and chief economist of The Clearing House.
The literature on multi-sided markets is well-developed, said Evans, who described it as a “mistake to overanalyze interchange fees.” The pricing model is pretty common in a lot of industries. Moreover, the model used to determine the level of interchange fees is incomplete, according to Chakravorti.
“These models are very dependent on various parameters, but I haven’t seen one that’s captured all parameters in one model,” he said.
Who wins and loses from interchange fee regulation: Evans and Zywicki agreed consumers took it on the nose. Evans went even farther, citing his recent study that found that consumers will lose a staggering $22 billion over time as a result shifting the costs of the debit card system from merchants to consumers.