ERIM Finance Seminar Vladimir Mukharlyamov
Abstract
After the Great Recession, new regulatory interventions were introduced to protect consumers and reduce thecosts of financial products. Some voiced concern that direct price regulation was unlikely to help consumers, because banks offset losses in one domain by increasing the prices that they charge consumers for other products. This paper studies this issue using the Durbin Amendment, which decreased the interchange fees that banks are allowed to charge merchants for processing debit transactions.Merchant interchange fees, previously averaging 2 percent of transaction value, were capped at $0.21, decreasing bank revenue by $6.5 billion annually.The objective of Durbin was to increase consumer welfare. Forconsumers to benefit, banks needed to notoffset Durbin lossesand merchants needed to pass through savings to consumers.Instead,we find causal evidence that banks fullyoffset lossesby charging higher fees for their products: For example, following Durbin, the provision of free checking accounts decreases by 40 percentage points.On the merchant side, we find that retailerspass-through savings most when debit usage is common and when competitive pressures are highest. However, we find little evidence of across-the-board consumer savings.Our analysissuggests that consumers are not helped bythis interchange regulation.