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U.S. Sen. Richard Durbin, author of the now-famous amendment bearing his name that upended the debit card industry, made a figurative trip to court this week to show his support for retailers challenging the Federal Reserve Board’s final rule implementing his provision in 2010’s Dodd-Frank Act. In a friend of the court brief filed with the retailer lawsuit, the Illinois Democrat argues that the Fed exceeded its statutory authority in regulating debit card interchange and failed to properly implement the amendment’s network-exclusivity provisions.
After issuing a preliminary rule in late 2010 that would have cut the interchange income of regulated debit card issuers, those with more than $10 billion in assets, by more than 70%, the Fed softened its position and came out in June with a rule cutting interchange by about half. The Fed also chose what many regarded as the least restrictive interpretation of the amendment’s network and transaction-routing provisions. The final rule emerged after intense lobbying by the banking industry for better terms. Merchant groups cried foul and in November sued the Fed to get the rule reconsidered.
“Even though a bipartisan majority in Congress had already considered and rejected the arguments of the financial-services industry in voting to enact the Durbin Amendment, the industry’s campaign succeeded in influencing the Board to issue a Final Rule in June 2011 that deviated from the plain text and intent of the statute that Congress had enacted,” Durbin’s brief says.
The case is pending in U.S. District Court in Washington, D.C. Durbin’s brief asks that the court declare that the rule does not comply with the amendment and to direct the Fed to revise it. Durbin’s lawyer is Washington attorney David Balto, a former antitrust official with the Federal Trade Commission.
Spokespersons for the Fed could not be reached late Thursday.
The Electronic Payments Coalition, a lobbying group of payment card networks and banks favoring the pre-Durbin status quo, issued a statement Thursday saying that “It’s remarkable that Senator Durbin is pushing for more” even after a recent Fed report about the amendment’s impact shows retailers are now saving $8.4 billion in debit card interchange expenses. “The merchants promised to lower prices if Congress capped interchange fees, but consumers haven’t seen any benefit whatsoever,” the EPC said. “ After all this, the only thing that’s changed is that retail profits have gotten higher.”
The board in its final rule set an interchange cap of 21 cents plus 0.05% of the sale with a 1-cent adjustment for fraud prevention. In his brief, Durbin says the Fed included issuer costs prohibited by the Dodd-Frank statute, including fixed costs, transaction monitoring by all regulated issuers for fraud prevention (Durbin says that’s allowed only for issuers that do effective monitoring) and fraud losses. The board also acted outside its permitted authority by including network switch fees in its interchange fee standard, the brief says.
Durbin also faulted the Fed in implementing the amendment’s network-exclusivity provision that requires debit cards from large and small issuers alike to assure that a transaction could be routed onto least one unaffiliated network. That measure outlawed exclusive deals in which the signature and PIN networks available on a card had common ownership. The Fed deemed a card to be in compliance if its PIN-debit mark was unaffiliated with the signature mark.
The senator noted that PIN-debit transactions use a single-message format in which authorization and clearing occur through the same message, while signature debit uses a dual format in which authorization and clearing information are carried in separate messages. But the single-message format doesn’t work for some types of transactions such as hotel stays because the final amount of the sale isn’t known at the time of authorization. Thus, with only one signature brand on a card, “the Final Rule thus fails to ensure that an electronic debit transaction ‘may be processed’ over at least two unaffiliated networks,” the brief says. Durbin said he isn’t demanding that the Fed require two signature networks on each card, and that one solution would be to overrule Visa and MasterCard rules that he says ban PIN-debit networks from processing signature transactions, and vice versa.
Plaintiffs in the case are the NACS convenience-store trade group, the National Retail Federation, the Food Marketing Institute; Miller Oil Co., Boscov’s Department Store LLC and the National Restaurant Association.
