Durbin’s Folly: The Erratic Course of Debit Card Markets

Richard Epstein, Dec 22, 2011

The passage of the Durbin Amendment in July, 2010 followed extensive claims by Senator Durbin and retailers that the only consequence of the law would be to bleed out the excessive debit interchange charges that platform operators and issuing banks collected from retailers. In their view, the proper source of revenues was from debit card holders themselves, as in the Canadian system. Events have not played out that way. After the Federal Reserve authorized a $0.21 base interchange fee, which was generous given the narrow statutory language, the major banks found it impossible to raise rates in the face of sustained political and market pressure, goaded on in part by Senator Durbin himself. At the same time, there is no evidence that the reduction in debit card fees have been passed through by merchants to their customers.
The reason this adventure into regulation has failed is that Senator Durbin and his allies did not understand the operation of the fast-moving two-sided debit card market. In their view, platform operators like Visa and MasterCard operated a duopoly that afforded them the market power to extract rents from merchants while feeding oversized fees to issuing banks in order to attract new streams of customers.
That analysis ignores two brute facts. First, the only contest between platform operators, banks and merchants is over the considerable surplus generated by a debit card interchange system. Those fees are constrained becaus…


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