Richmond Fed Looks at Durbin’s Unintended Consequences

May 9, 2013

In its most recent regular quarterly report, the Federal Reserve Bank of Richmond explored how the Durbin Amendment regulating debit interchange has affected banks, merchants and others in the payments industry in the first year of its implementation. The paper, authored by Fed economist Zhu Wang, said the billions in revenue forfeited by issuers since debit interchange was capped under the 2011 law is only the most visible result of Durbin. The expected windfall for merchants, however, has not materialized for everyone. “While merchants as a whole have benefitted from the reduced interchange rates, merchants specializing in small-ticket transactions have been adversely affected,” Wang wrote.

The Richmond team’s economic research found, and many merchants would be keen to agree, that “market-determined interchange fees tend to be too high compared with the social optimum, so [continuing to regulate] down interchange fees could be welfare enhancing.” But putting a cap on the maximum interchange fee may not be working the way lawmakers had hoped. “Capping the weighted average interchange fee, instead of the maximum interchange fee, may avoid the unintended consequence on small-ticket merchants.”

For an in-depth look at the Durbin amendment by the Richmond Fed, download its Economic Quarterly here .