This article previously ran on CUInsight.com.
Lawmakers are preparing for a showdown in Washington over the Dodd-Frank Wall Street Reform and Consumer Protection Act. And with a Republican-controlled Congress and White House, some of the controversial law could be repealed – including the Durbin Amendment, a merchant-friendly provision added at the last minute that caps interchange fees and requires issuers to support more than one card network.
Will a Durbin repeal be included in Dodd-Frank reform? It’s possible, according to California-based payments expert John MacAllister of Dorado Industries. Given the current political climate, he says, Congress might take action to at least neutralize the law’s impact on card issuers.
“Trump might say ‘Let’s look at this because it disrupts the economy,’” MacAllister said of Durbin. “If that’s the case, then the nine largest credit unions will find themselves in a much better market position, and the rest will benefit as well.”
Durbin’s Hidden Costs to Credit Unions
That’s because even though the interchange cap only directly affects card issuers with $10 billion or more in assets, Durbin indirectly reduces revenues for smaller financial institutions as well.
“Many credit unions believe they are not adversely affected by Durbin, but they are wrong,” he stressed. “Retailers are pressuring networks to close the gap between regulated and non-regulated rates, and rates are generally declining in small increments as a result.”
Credit unions have also seen compliance costs rise because Durbin requires them to provide two network options for card transactions.
“Credit unions could see a small increase in non-interest income if Durbin is repealed,” said MacAllister. “Which is why I believe that money spent lobbying to reform Dodd-Frank is money well spent.”
The Odds of a Durbin Repeal
CO-OP Financial Services EVP Jim Hanisch notes that a specific amendment to the legislation, such as Durbin, has a better chance of being addressed on Capitol Hill than the Dodd-Frank Act in its entirety. He adds that it will all come down to whether Durbin carries enough importance with lawmakers to be considered for repeal, and whether representatives in the House and Senate are willing to take sides between two important lobbying groups: retailers and financial institutions.
“That is not a scenario anyone in Congress wants to create,” said Hanisch.
If Durbin is addressed, he says, the two-network requirement is not likely to be amended because it promotes marketplace competition. However, the interchange cap could be viewed as a form of price fixing, which is generally considered a poor regulatory practice.
He added, “The United States has the highest interchange in the world. Regardless of legislation, market forces will continue to put pressure on interchange fees, driving them lower.”
MacAllister, who consults with merchants as well as issuers, emphasizes that retailers are so focused on interchange costs today, they’ve lost sight of the many benefits cards provide for them. Should Congress pass a repeal of Durbin’s interchange provision, he predicts things could get ugly.
“Merchants may seriously question whether accepting all cards still makes good business sense,” he said, citing Walmart Canada as an example of how U.S. retailers might respond if Durbin is repealed. The retail giant threatened to stop accepting Visa debit cards and took two stores offline, prompting Visa to negotiate a settlement.
“We could have a very interesting payments fight on our hands,” he said.