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Economic Analysis of the Effects of the Federal Reserve Board’s Proposed Debit Card Interchange Fee Regulations on Consumers and Small Businesses

51 Pages Posted: 26 Feb 2011 Last revised: 1 Mar 2011

David S. Evans

Global Economics Group; University College London

Robert E. Litan

Council on Foreign Relations (CFR) - Council on Foreign Relations- Washington D.C.

Richard Schmalensee

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Date Written: February 22, 2011

Abstract

This paper examines the impact of the reductions in interchange fees proposed by the the Federal Reserve Board on consumers and small businesses. We find that consumers and small business would face higher retail banking fees and lose valuable services as banks rationally seek to make up as much as they can for the debit interchange revenues they will lose under the Board’s proposal. The number of unbanked consumers would increase as lower-income households reduce the use of higher-priced accounts. Small businesses would lose in the first 24 months the proposed rules are in effect because of the offsetting increase in bank fees. Most of these small businesses do not accept debit cards and therefore would not have any offsetting benefits from lower interchange fees. Large retailers would receive a windfall.

Keywords: Debit Cards, Interchange Fees, Financial Regulation, Durbin, Federal Reserve Board

JEL Classification: G21, G18, L51, L52

Suggested Citation

Evans, David S. and Litan, Robert E. and Schmalensee, Richard, Economic Analysis of the Effects of the Federal Reserve Board’s Proposed Debit Card Interchange Fee Regulations on Consumers and Small Businesses (February 22, 2011). Available at SSRN: https://ssrn.com/abstract=1769887 or http://dx.doi.org/10.2139/ssrn.1769887

David S. Evans (Contact Author)

Global Economics Group ( email )

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Suite 900
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University College London ( email )

Gower St
London WC1E OEG, WC1E 6BT
United Kingdom

Robert E. Litan

Council on Foreign Relations (CFR) - Council on Foreign Relations- Washington D.C. ( email )

1777 F Street, NW
Washington, DC 20006
United States

Richard Schmalensee

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

Room E62-525
Cambridge, MA 02142
United States
617-253-2957 (Phone)
617-258-6617 (Fax)

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