Previous business/academic article Next business/academic article

Assessing the Durbin Amendment’s Debit Card Interchange Fee Cap: An Application of the “Tourist Test” to US Retailer Data

Anne Layne-Farrar, Review of Network Economics, May 2013.

See Anne Layne-Farrar's resume

Click here to read the full article online

Payment cards have been a perennial source of debate among economists. That debate received additional fodder in 2010 with passage in the US of the Durbin Amendment, which targets debit card interchange fees. I assess the Durbin Amendment, testing the interchange fee cap it imposes against the “tourist test” proposed in the theoretical literature. I first calculate merchant incremental payment processing costs across payment instruments. While I find that debit card bank fees are higher than bank fees for other instruments, a comparison of other incremental costs softens that conclusion. With the cost estimates in hand, I then compare the interchange fee suggested by the “tourist test” with that set by the Durbin Amendment. The empirical assessment of the tourist test highlights the importance of the instrument whose costs are “avoided” – whether cash or check is used dramatically alters the test and indicates that an optimal one-size fits-all interchange fee cap will be difficult to achieve.

© 2014 - Institute of Competition Law Download our brochure