The Durbin Amendment is the first of the major provisions of the Dodd-Frank Act to have been implemented-but only after it withstood a constitutional challenge on the basis of the Takings Clause in the U.S. Court of Appeals for the Eighth Circuit. Now that the Amendment has taken effect, this Article addresses the false economic logic that led to its passage and the dubious arguments used to sustain its constitutionality. On the first issue, the supporters of the Durbin Amendment denounced the highly effective debit card system as a form of cartelization of the industry, which yields excessive returns to banks while overcharging retailers high rates for low-cost services. That objection rests on three central fallacies. The first is that the industry is monopolistic, when in fact, there is extensive competition for customers at every level. The second is that this critique ignores the economics of two-sided markets, under which transfer payments from retailers to customers expands the universe of debit card customers, spreading around the cost of operating the system. The third is that the costs of providing debit card services are limited to the marginal costs of providing services, but this critique ignores the fixed costs necessary to put the system in place.
The failure to realize that these fixed costs need protection against government expropriation is the central error of the Eighth Circuit, which falsely assumed that firms in competitive industries need less protection than regulated monopolies. The paradox is that this argument gets it exactly backwards. The justification for regulating natural monopolies is to imitate competitive rates to the extent possible. But that justification is singularly unavailable with the debit card industry, which the Eighth Circuit held lacked monopoly power. At this point, there is no justification for any rate regulation, given that the debit card companies are already at the competitive rate and cannot recoup all their losses- direct charges to their customers requires the loss of the efficiency gains that interchange fees are able to exploit to good effect in a two-sided economic market. Thus, the Durbin Amendment, because of paradoxical thinking, has resulted in unconstitutional regulatory takings of the debit card companies.
May 2015, Vol. 67, No. 3
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