Economic Analysis: Durbin Amendment As Part of Essay

Economic Analysis: Durbin Amendment

As part of the Dodd- Frank financial regulatory overhaul passed in 2010, the Durbin Amendment was designed to "reduce costs for merchants that accept debit cards" (Sidel, R. December 8, 2011. PP. 1) by imposing a ceiling on the interchange fees which the banking service industry could charge their clients. As with most government intervention into economic activity, there is well intention to ameliorate perceived market failures, protect consumers, or more strongly regulate business. Yet, the Durbin Amendment demonstrates how externalities arise from beneficent government activity. In this case many small to medium size merchants, and consequently their customers are experiencing higher costs not lower.

Summary

The Durbin Amendment's ostensible goal is to protect merchants from the confiscatory pricing on debit card interchange fees charged by the banking industry. The legislation empowered the Federal Reserve to set interchange prices, "capping merchant customer debit card fees at 21 cents per transaction- down from an average 44 cents" (Zywicki, T. September 29, 2011. PP.1). The banking industry is now "faced with a dramatic cut in revenues (estimated to be 6.6 billion by Javelin Strategy & Research)" (Zywicki, T. September 29, 2011. PP. 1), and is looking to recoup this loss through multiple avenues, including increases in interchange fees for small to medium size merchants which conduct "transactions that are less than $10" (Sidel, R. December 8, 2011. PP. 1). Prior to Durbin, banks and financials which "used to give merchants discounts on debit-card fees paid on small transactions, have responded by eliminating the discounts" (Sidel, R. December 8, 2011. PP. 1). Additionally, banking institutions have made significant changes to individual customer accounts "imposing new monthly maintenance fees-usually from $36 to $60 per year-on standard checking and debit….....