The Law of Unintended Consequences

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Matthew Goldman is the Founder of fintech consultancy Totavi and the Publisher of CardsFTW. He is a serial entrepreneur, having started five businesses, raised more than $30MM in capital from leading investors, and successfully participated as a founder or executive in four exits worth more than $1.6 billion. Matthew's fintech experience encompasses card issuing, banking-as-a-service, personal finance tools, loyalty, and rewards.

The Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) was enacted into law on July 21, 2010, reflecting the collective anger of Americans against the hubris and greed of banks before the Great Recession of 2008. The Durbin amendment to the Dodd-Frank Act, known as Regulation II, was a last-minute addition from Illinois Senator Dick Durbin, which regulates the interchange fees that banks can charge merchant acquirers for accepting debit cards. 

Regulation II applies only to those financial institutions with more than $10 billion in assets, requiring them to charge only fees that are reasonable and proportional to the actual cost of accepting these cards. The law granted the Federal Reserve Bank the power to determine that rate, which is currently 21 cents per transaction plus five basis points (0.05%). Prior to the law, interchange fees were routinely 120 to 150 basis points.

The stated reason for the Durbin amendment is to protect consumers (via merchants) from banks making money on transactions. In some idealized state, regulating what banks can charge for debit card acceptance would return money to consumers via reduced prices. There is no proof that this occurred. In contrast, the Federal Reserve Bank of Richmond produced a 2014 study that found that the majority of respondents (75%) reported no price change due to regulation.^[1] For those that did change prices, more merchants (23%) reported they increased prices, while only 2% decreased prices. 

The Durbin amendment did shift money from one type of entity to another: from banks back to merchants. The Electronic Payments Coalition (not an impartial party, of course), estimated the shift was $42 billion in 2016.

When faced with the loss of billions of dollars in revenue, banks, who are savvy revenue managers, decided to charge for previously free services provided to their customers. Free checking accounts rapidly disappeared following the implementation of Dodd-Frank, and the remaining “free” checking accounts required greater deposits.

Action, Reaction

The Durbin amendment is credited with creating the consumer fintech boom. While technology-driven innovation in personal finance didn’t start with Durbin, the industry certainly shifted. First, the increased fee structures of banks created an opening for low- and no-fee consumer debit products that could more easily compete with banks. While early pioneers like Green Dot and NetSpend charged fees for their cards ($4.95 per month and up at the time), new entrants, like Chime, took a no-monthly fee approach. These second-generation fintech banking products leveraged less expensive infrastructure costs, incremental interchange produced by Durbin-exempt banks, and millions in venture capital to fund no-fee banking account alternatives.

Second, the arbitrary $10 billion asset cap created two classes of banks: those who could earn more traditional interchange income (those under $10 billion, known as “Durbin-exempt” banks) and those who could earn only the Fed’s cap. With a single regulatory action, the playing surface shifted dramatically, creating a massive opportunity and incentive for experimentation at banks with little infrastructure to manage it.

When I started my career in fintech at Green Dot in 2006, our partner banks were Columbus Bank & Trust (a unit of Synovus, a top-30 financial group at the time), GE Money (now Synovus), and Citibank. Each of these institutions had strong compliance and regulatory oversight of our program. The bank’s skilled staff was capable of managing the products we were building at Green Dot. (Some of the stuff we tried in an era before PCI compliance and other regulations would sound wild today!)

A few banks specialized in payment processing and card sponsorship at the time, such as Bancorp and Pathward (MetaBank at the time). Much as today’s sponsor banks are routinely cited in regulatory consent orders, both of these smaller banks had their share of regulatory run-ins.

Things Fall Apart

Today, we live in the world created by the Durbin amendment, in which hundreds of thousands of U.S. consumers are unprotected and with limited access to their original deposits through fintech failures. Synapse's collapse and ongoing dispute with Evolve Bank & Trust have demonstrated a fundamental weakness in our regulatory regime and are a direct consequence of Durbin. Evolve was never capable of managing the breadth and scope of the fintech programs on its books. 

Prior to 2017, Evolve was a sleepy Arkansas-based community bank and mortgage lender. (Not that it was great at that: the bank received a consent order for violations of fair housing regulations.)^[2] Many community bankers were pushed post-Durbin by industry consultants and analysts to dive into fintech sponsorship (or Rent-a-BIN operations) to drive fee income. Community banks across America listened to these consultants because they had to–the broader shift from small community businesses to large corporations caused community banks to suffer much like your small-town grocery store, which cannot compete with Amazon and Walmart. As older customers sell businesses or pass on, younger consumers are increasingly choosing national banking brands. (Ironically, one could blame deregulation for some of this, with interstate banking freedom leading to mass consolidation.)

Many small banks, more than 100, depending on who you ask (my list is only ~70), entered the sponsor bank industry without the knowledge, staff, or fortitude to manage their fintech partners. With fintech companies themselves backed by tens of millions in venture capital, it is easy for many of them to push around their sponsor banks. Silicon Valley's “make mistakes and move fast" ethos is not well-suited for banking and has created a long legacy of banking and consumer failures.

Mistakes:  Learn from, or Repeat?

Fintech innovation existed without Durbin and would have continued without it, perhaps at a different pace. However, technology companies partnering with more sophisticated institutions would have faced stronger compliance requirements and likely would not have lost access to more than a quarter of a billion dollars at peak.^[3]

There is a tight balance between too much and too little regulation. Our banking system demands regulatory oversight to protect consumers and the economy. Regulating the prices charged between two large industries with large players has produced many negative unintended consequences and created an uneven playing field.

Congress has not learned anything from Durbin. The Credit Card Competition Act is being promoted as a way to bring the same regulations from debit cards to credit cards, limiting the interchange that banks can charge merchants on credit card projects. I do not understand the allure of the idealized small business person who deserves protection from banks more than anyone else. For whom is the CCCA? Are small business owners better people than those who work at banks? Are they more worthy than consumers who want travel rewards? Absolutely not. In fact, most small business owners carry, and love, their high-cost, high-reward cards like the American Express Platinum or Capital One Spark Card. Are small business owners blind to the fact that interchange pays for the 2% cashback rewards and airport lounge access they love? It comes from interchange, which is paid by merchants just like them.

I am hopeful Congress won’t pass the CCCA because the mass-affluent voters of this country will allow you to take their rewards from their cold, dead hands. However, the same narrative that brought us Durbin is being used to push the CCCA: banks are big, banks are bad, and consumers will save if we don’t allow credit card interchange to be 3%.

That story is, frankly, unbelievable. If we regulate credit card interchange, a product that is often free for consumers today will become more expensive, retail prices will not go down, and the most prominent merchants will benefit more than anyone else. Large banks will find some other way to make money (fees, higher interest rates). If there is a similar exemption, fintech companies will flock to unqualified banks to issue credit cards, which will ensure some new major problems. (An important aside is that there are a handful of highly qualified fintech credit card sponsor banks of smaller size, but depending on regulations they may not qualify for higher rates.)

Durbin and the proposed CCCA are prime examples of the unintended consequences of unnecessary regulations. Merchants do not have to accept debit or credit cards. Some don’t! However, most merchants find the trade-off worthwhile. In most cases, a 3% fee is less than the true cost of cash and checks, and drives increased spending.^[4] Merchants are free to make their own choices, as are consumers. I will pay 3% surcharges sometimes because of the ease and consumer protections of my card. The beauty of the unencumbered market is that we can all make our own choices. 

Lawmakers and regulators should take a hard look at the real-world impacts of Durbin: no reduction in consumer prices, more expensive banking products, more small banks building complex products, and ultimately, more risk in the system, before they decide to double-down on regulating interchange for credit cards. Taking away credit card rewards will anger many everyday voters, do nothing to protect consumers, and likely have some unintended consequences.

The opinions shared in this article are the author’s own and do not reflect the views of any organization they are affiliated with.

^[1]  Wang, Zhu, et al. "The Impact of the Durbin Amendment on Merchants: A Survey Study." Economic Quarterly, vol. Third Quarter, 2014.

^[2]  U.S. Department of Justice, Civil Rights Division. (n.d.). Consent order: United States v. Evolve Bank & Trust, W.D. Tenn.

^[3]  Son, Hugh (2024, July 2). Synapse fintech faces scrutiny over FDIC insurance claims. CNBC.

^[4] Morris, Julian, and Ben Sperry. "The Cost of Payments: A Review." ICLE White Paper, 2024.

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