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The events unleashed by U.S. District Judge Richard J. Leon’s seismic decision at the end of July have not completely unfolded as we write. More hearings are yet to be held, and the Federal Reserve has until the end of the month to decide whether to appeal.
But one thing is crystal clear: Just as the e-payments business had more or less crafted a modus vivendi for the Fed’s 2011 so-called final rule implementing the Durbin Amendment, Leon’s bluntly written, 58-page opinion upending that regulation threw everything into a cocked hat. Like the Durbin Amendment or not, it’s now back, front and center, stronger than ever. To read why, see “Once Again, with Feeling” in this issue.
In its essence, Leon’s opinion spanks the Fed for what he, and complaining merchants, see as its failure to abide by the clear language of the law. Without himself setting debit card rate caps and routing rules, Leon growls that the Fed’s original, proposed rule, released in December 2010, was closer to Durbin’s intent.
That’s the proposal that set a “safe harbor” cap of 7 cents and included the idea, known rather inelegantly as Alternative B, that each card should allow merchants a choice of at least two competing networks for each authentication method, signature and PIN. After considerable logrolling by the banking industry, the Fed by the time it released its final rule six months later had watered all that down to a cap of 21 cents plus a bit and just two competing networks per card.
The judge’s decision is astonishing not only because of how it has unsettled the industry but also because courts have customarily granted wide latitude to regulatory agencies interpreting Congressional intent.
It is not astonishing, however, in its conclusions. Anybody who read the Durbin Amendment and then read the final rule could see the Fed had strayed off the reservation. Even the law’s author, Sen. Richard Durbin, called them out for it.
Regular readers of this column will know we hold no brief for this unfortunate law, which replaces market-based pricing signals with the fiat of Congressional staffers. It also assumes consumer benefits in the form of lower store prices, which are subject to a host of influences besides interchange rate caps. But this remains a nation of laws, and it’s no good passing a law if it’s going to be distorted out of recognition by those responsible for enforcing it.
That’s Judge Leon’s message. Now the Fed must re-do its handiwork, and bank and network opponents of Durbin must figure out where they went wrong in Congress so they can prevent the next Durbin.
John Stewart, Editor
john@digitaltransactions.net
