Study Shows Durbin Amendment Price Controls Help Payday Lenders More Than Consumers

A debit card swipe fee price-control amendment championed by Sen. Dick Durbin (D-IL) is driving consumers to payday lenders, a surprising unintended consequence of the controversial law, according to economic research firm, Moebs Services.

The findings are deeply embarrassing to Durbin, who has long sparred with the lending companies, which offer short-term loans at relatively high interest rates.

Moebs found that some banks, which have lost billions of dollars in revenue as a result of the Durbin amendment, responded, among other things, by increasing overdraft fees.

Some consumers, faced with overdraft fees that average $30, have instead turned to payday lenders, who charge an average of $18 per $100 borrowed.

“So the consumer says, ‘I’m not going to put up with that’,” Michael Moebs, economist and CEO of the research firm. “And who’s standing there to provide help? The payday lender.”

Durbin last year warned consumers against the “devastating consequences” and “crippling effects” of “predatory” payday lenders.

The Durbin amendment, included in the 2010 Dodd-Frank law, set price controls on the fees debit card companies can charge retailers for processing payments.

The retail industry lobbied heavily for the price controls, arguing cost savings for Best Buy, Walmart and other large chains would trickle down to consumers. Economic research conducted since the caps were implemented, however, found retailers largely kept the marginal difference as profit, leaving prices intact.

The Moebs report notes that overall, overdraft revenue is actually down from 2006, despite the higher prices, likely the result of increased regulations that have resulted in fewer account holders facing the charges.

The report also argues the banks have turned to credit cards as an alternative revenue source since credit card payments are not subject to as many restrictions as debit card payments.

For example, Moebs says credit card interchange fees surpassed overdraft fees in revenue for the first time last year. “This is a major shift in how depositories have collected fees for decades,” Moebs said.

The study finds that the Durbin amendment has wreaked havoc on the market with unintended consequences. However, the study is flawed in that it doesn’t account for the real reason for increases in interchange revenue.
For instance, Moebs ignores the trend of increased consumer spending across this period. For example, consumers are on track to spend $1.6 trilion more in 2017 than 2011, the year the Durbin amendment was implemented, according to the Bureau of Economic Analysis. Moebs also contends that credit card interchange has risen because it assumes that banks have promoted credit cards in response to the Durbin price controls on debit interchange. But between 2002-2017, credit card transaction volume has risen at a steady 6.7% annual increase, with no discernible up-tick following the Durbin amendment, according to data from Euromonitor. This is more likely responsible for the aggregate increase and shows that interchange fees are not necessarily higher per transaction.

One thing that is clear from the data, consumers would be better off without Durbin’s interference in the free market.
Arbitrary controls on prices to favor one industry over another often end up distorting the market in unexpected ways. But Durbin driving customers to payday lenders is one of the more memorable twists on big government intervention in recent memory.

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