Highlights:
The Federal Reserve is considering a rule that would impose stricter price controls on the fees charged for the usage of debit payment networks. Known as interchange fees, these charges substantially fund the electronic payment networks on which consumers and businesses rely and compensate participating financial intuitions for the associated risks and costs. A provision in the Dodd-Frank Act of 2010 known as the “Durbin Amendment” imposed a cap on these fees. The history of price controls reveals an unbroken string of failure, and the interchange cap has been no different. Unfortunately, the Federal Reserve, which administers the cap, has proposed an update to the fee cap that would impose even steeper price controls. The effects of such a proposal are entirely predictable.
Price Controls Fail Again
The Durbin amendment was a somewhat last-minute addition to Dodd-Frank, and found support in the post-financial crisis antipathy towards financial institutions. Supporters of the interchange fee cap argued that benefits would accrue to consumers. Instead, according to a study by the Richmond Federal Reserve, retailers largely pocketed the difference and did not pass along savings to consumers. If the cap is lowered again, this pattern is likely to repeat. Indeed, it should not surprise that major retail chains have been strong supporters of this approach.
Harm to Small Banks and Credit Unions
Among the fantasies central to price-control policies is that economic outcomes can be determined by writ. The Durbin amendment indulged in similar fantasy and nominally exempted smaller institutions from the strictures of the cap. Under the law, the fee cap only applies to banks and credits unions with assets of $10 billion or more. Despite this provision, the cap put downward pressure on interchange fee revenues across all financial institutions. Community banks and credit unions operate within the same payment networks as larger institutions and ultimately feel the ripple effects of pricing regulations. Research from the Mercatus Center found that nearly half of small banks saw significant revenue declines despite being nominally excluded from the rule’s primary caps.
These declines have direct consequences. Less interchange revenue forces small banks to compensate elsewhere, leading to increased fees on checking accounts, higher overdraft charges, and fewer rewards programs. The new proposal threatens to accelerate these trends, further reducing the competitiveness of small financial institutions relative to larger banks that can more easily absorb revenue losses. The ripple effect continues throughout the banking sector, again failing on consumers. Indeed, debit interchange price controls were estimated to have increased the unbanked population by about 1 million.
A Government Accountability Office (GAO) report further confirmed these negative outcomes, highlighting that checking account fees increased and debit rewards programs virtually disappeared following the implementation of the Durbin Amendment. A University of Chicago study that examined the effects of the Durbin amendment summarized the effects of the legislation succinctly: “We find that consumers lost more on the bank side than they gained on the merchant side. Our estimate is that, based on the expectations of investors, the present discounted value of the losses for consumers as a result of the implementation of the Durbin Amendment is between $22 and $25 billion.”
The Fed’s proposal all but guarantees a repeat of these failures, yet policymakers seem intent on ignoring the historical record.
Misleading Cost Assumptions
In its proposal, the Federal Reserve argues that the cost of processing debit transactions has declined since 2011, justifying a lower fee cap. However, this claim ignores significant industry-wide cost increases in fraud prevention, compliance, and card issuance. In a recent comment letter, the Competitive Enterprise Institute highlighted that these costs have risen sharply over the last decade. Fraud prevention, in particular, is a critical yet overlooked expense. Interchange fees help fund investment in cutting-edge security technologies that reduce card fraud and identity theft. A reduced fee structure weakens financial institutions’ ability to invest in these measures, creating additional risks for consumers.
Regulatory Overreach and Legal Uncertainty
The proposal includes a provision allowing for automatic biennial fee reductions without public input, a clear overreach that effectively grants the Fed unchecked pricing authority. This authority was never expressly granted to the Fed under the Durbin amendment, and d may violate the Administrative Procedure Act (APA), which requires agencies to provide clear justifications for regulatory changes. Automatic adjustments without industry feedback further heighten market uncertainty, making it more difficult for financial institutions to plan for long-term sustainability.
This regulatory unpredictability does not just impact banks and credit unions—it creates ripple effects throughout the financial ecosystem. Businesses that rely on stable payment processing costs and consumers who depend on affordable banking services will ultimately bear the consequences of these poorly justified policy shifts. Critically, the Federal Reserve itself can’t justify the proposed rule on a cost-benefit basis, noting that it, “cannot determine at this time whether the potential benefits of the proposal to consumers exceed the possible costs imposed on consumers and financial institution.”
Conclusion
The Federal Reserve should withdraw this misguided rule before it compounds the financial burdens on American consumers and financial institutions. The evidence is clear what the result of this rule will be if it goes forward: Big-Box retailers will see a windfall, while consumers will see higher costs and reduced access to financial services. If policymakers truly care about consumer welfare, financial inclusion, and a competitive banking sector, they should promote market-driven competition and deregulation instead of repeating past mistakes. Continuing down the path of arbitrary price controls will do little to help consumers and much to weaken the financial system, all while benefiting large retailers who have no obligation to share the gains.