Digital Transactions Authoritative, insightful and timely information for payments professionals
An appellate court’s Friday decision reinstating the Federal Reserve Board’s controversial interpretation of the Dodd-Frank Act’s Durbin Amendment with its debit card interchange cap and transaction-routing requirements continues to draw fire, but whether the merchants and retail groups that brought the appeal and lost will trudge on in court remains unclear.
One of the appellants, NACS, formerly the National Association of Convenience Stores, said in a statement Monday that “we intend to review all of our options,” but did not specifically say whether it would appeal. A spokesperson for the Alexandria, Va.-based trade group tells Digital Transactions News that NACS has at least 45 days to file an appeal. Another plaintiff, the Washington, D.C.-based National Retail Federation, also is mulling its legal options. NACS and the NRF are two of six merchants and retail groups whose November 2011 lawsuit against the Fed led to Friday’s decision.
A three-judge panel on the U.S. Court of Appeals for the District of Columbia issued the ruling. Payments-industry attorney Anita Boomstein, a partner at Hughes Hubbard & Reed in New York, says the merchants' options include appealing to the full D.C. circuit court or going directly to the U.S. Supreme Court. Their odds of getting a review are long with either choice, she says.
Many merchants and their trade groups, including those that went to court, said the Fed strayed beyond Congress’s intent when its June 2011 rule implementing the Durbin Amendment set an interchange cap of about 23 cents per transaction (21 cents plus 0.05% of the sale and a possible penny for fraud control) for regulated debit card issuers, about half of what they were earning per-Durbin. The rule also imposed transaction-routing requirements intended to give merchants more network choices to potentially lower their interchange costs. Merchants were overjoyed when U.S. District Judge Richard Leon overturned the rule last July, saying the Fed had gone beyond what Congress had spelled out, but the Fed appealed.
As had Leon, the appellate court reviewed what incremental and other costs Congress said the Fed could consider when setting its interchange cap for issuers regulated by the amendment, those with $10 billion or more in assets. But it disagreed with Leon’s narrower interpretation, which might have required a cap of 7 cents or even lower.
Amendment author U.S. Sen. Richard Durbin of Illinois, the Senate’s No. 2 Democrat, was quick to lambaste the appellate decision, saying it will benefit big banks, which receive interchange paid by merchants, and bank card networks Visa Inc. and MasterCard Inc., which set interchange rates. He also alluded to the networks’ increase in small-ticket interchange rates after the Fed came out with its rule.
“Today’s opinion by a panel of appellate judges is a giveaway to the nation’s most powerful banks and a blow to consumers and small businesses across America,” Durbin said in a statement Friday. “The court completely ignored how the Federal Reserve’s swipe-fee rule allowed Visa and MasterCard to dramatically increase debit swipe fees on many small businesses, contrary to Congress’s clear language and intent.” He later added that the decision “effectively preserves the Fed’s rule as currently in effect, and will prove to be a multi-billion dollar hit to American consumers and small business.”
Consultant Eric Grover, principal of Minden, Nev.-based Intrepid Ventures, calls the Durbin Amendment “bad law” but says Leon actually got it right by hewing close to what Grover says is clear statutory language. “Looking at the D.C. [appellate] court—they were looking for a reason to give the Fed deference,” Grover tells Digital Transactions News. “They went at length how ‘incremental’ was statutorily ambiguous and can mean a lot of things. I think the law was pretty straightforward.”
Adds attorney Boomstein: “This decision is surprising because the statutory language appears unambiguous.”
The solution, according to Grover, would be for Congress to readdress the issue, not have regulators “mitigate a bad law,” which is what Friday’s decision will enable the Fed to do, he says. “It’s a terrible piece of legislation, but I don’t think it’s that unclear,” says Grover.
Various groups representing banks and credit unions issued statements Friday supporting the appellate decision. Co-Op Financial Services, a processor and network for credit unions, said in regard to the transaction-routing requirements that had Leon’s decision stood, issuers would have needed to establish relationships with multiple PIN- and signature-debit networks. “This would have impacted all of our clients, adding costs and potentially reducing interchange revenue,” the Rancho Cucamonga, Calif.-based organization said. “Today’s ruling on this matter is truly a significant victory for the credit-union movement.”
A Fed spokesperson issued a brief statement saying “the Board is pleased with the outcome of the appeal.”
