ERIM Finance Seminar Vladimir Mukharlyamov


Speaker


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.