One of the great challenges for government intervention in public policy is the creation of unintended consequences. We often get excited at hearing about some new law that is intended to save us money, but just as often those savings end up costing more than expected.
The Durbin Amendment revisited
It looks like this is the case with the Durbin Amendment, which was tacked onto the Dodd-Frank financial reform legislation in 2010. Prior to the law, interchange fees would be assessed by issuers, like Visa and MasterCard, to merchants when a credit or debit card was swiped. Debit card usage was usually free of charge to the consumer. On average, the banks would end up getting 2% of the transaction as swipe fees.
The Durbin amendment capped the fees, limiting them to swipe fees that were “reasonable and proportional to the actual cost.” The broader purpose was to address the problem that Visa and MasterCard were an effective duopoly, and could set the market price for interchange fees for all merchants. The effective ultimate intent was to reduce fees the bank was collecting, the merchants would save money, and they would oh-so-generously pass those savings onto consumers.
Uh … no.