Durbin Amendment: The Debit Card Debacle and the Triumph of the Mega Retailers

(Photo by Kevin Sanders.)

(Photo by Kevin Sanders.)

The litigation over debit card fees currently taking place in the courtroom of U.S. District Judge Richard Leon has left many people puzzled over just what is going on and why anyone should care. To understand the argument one needs to step back and analyze the implications of the Durbin Amendment, which is what the fight is over, to our economy. A semi- apocryphal story will illuminate the issue.

A priest, a minister and a rabbi walk into a local coffee shop, owned by a sole proprietor we’ll call Pat. Each buys a cup of coffee for $1.50. The priest pays with a debit card, issued by a bank with less than $10 billion in assets; the minister uses his debit card, from a bank with greater than $10 billion in assets; and the rabbi is carrying a credit card. Pat will pay about $0.10, $0.22 and $0.09, respectively, for the priest’s, minister’s and rabbi’s purchases. In other words, depending on which card the clergyman pulls out, Pat will net between $1.41 and $1.28 for the same three cups of coffee she brewed. Pre-Durbin, Pat could have netted approximately $1.40-$1.41 from any of the three sales.

Having now exhausted their small talk, the clergymen turn to deeper ecumenical issues and decide they need a stiffer brew so they head into a nearby hotel bar. They run up a tab of $40 and, being in a generous mood, the priest, the minister and the rabbi all reach for the check. Suddenly, a voice from the Heavenly Court, audible in only their heads, speaks the following words: “Absurdity of absurdities, all is absurd!” If the priest picks up the tab, the cost to the hotel bar is about $0.70; if the minister picks up the check, the cost is $0.23; and, if the rabbi pays, the cost is around $0.92. The net revenue from the drinks can range from $39.77 to $39.08, depending only on whoever is swiftest to grab the check. As the voice became silent, the three clergymen looked at each other and split the bill with cash. They then took a vow to never again go to bar together, lest they become a joke.

The results of the Durbin Amendment have become perverse. The price controls on debit card fees for just some banks was touted as a way to help small retailers. In fact, the biggest beneficiaries have been utility companies, hotels and e-commerce merchants. Smaller retailers selling lowest priced merchandise may have even been hurt on a net basis. And there is no doubt that the competitive gap between the large retailers and small ones has been magnified. That is no real surprise since despite the rhetoric, mega retailers such as Wal-mart, Target and Sears were the real powers behind the amendment although they used small family owned retail stores as their shield, and sympathetic lead plaintiffs. Had the mega retailers truly wanted to encourage small business, they could have pushed for an amendment to require that their smaller competitors receive the same prices negotiated and paid by the mega retailers. Consumers have also not been helped, as there is no evidence that any of the savings reaped by the mega retailers have been passed on to the consumer.

As with most small- and medium-sized businesses these days, smaller retailers are disadvantaged versus larger competitors due to ever increasing detailed regulation at federal, state and local levels as well as a tax code that heavily favors large companies with the immense resources needed to navigate the spiraling complexity of the tax rules. My local barber on the Upper East Side was recently fined $1,700 for 1) not having a sign posted that he only accepted cash and 2) that unsatisfied customers could come back for a free touch up. Incidentally, both of these were his policy for decades, as all his customers knew. He had to pay up as he could not spend the personal time away from cutting hair and the money needed to fight this. By contrast, a large company would just assign the violation notice to a staff lawyer. The same logic applies to the tax code in which small companies cannot expend the resources to set up multi jurisdiction domiciled entities to arbitrage tax rates.

So now we have spectacle of the implementation of the Durbin Amendment and monstrously complex cost allocations being estimated by Federal Reserve officials all of which makes no sense, being argued in front of a court whose decision will impact all sorts of consumers and industries in all sorts of ways that no one comprehends. Shouldn’t all involved have something better to do with their time?

Small and medium sized businesses are still the biggest job creators in the United States. Congress should embark on a radical simplification of a variety of rules to reverse the impediments that have tipped the scales heavily favoring bigness heavily over efficiency. Cloaking legislation such as the Durbin Amendment in the guise of being “small business friendly” while in fact tilting the scales further away from small business and the consumer is actually a job-killing policy. It should be reversed.

As we approach, the new SAT study season, the only useful part of the Durbin Amendment is that budding college bound students can now grapple with a new analogy. The Broadway production of “The Book of Mormon” is to religion as the Durbin Amendment is to capitalism — a comic caricature. But the lost economic efficiency and lost jobs in the case of the Durbin Amendment should have no one laughing.

Scott A. Shay is Chairman of Signature Bank of New York.