Fed Runs 'Afoul' of Durbin Amendment, Judge Says

NACS sees vindication as court rejects Federal Reserve's debit-card swipe-fee rules

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WASHINGTON -- Calling it a vindication and a victory "on all counts," NACS hailed a judge's ruling on Wednesday that the Federal Reserve Board disregarded Congress's intent when deciding how much banks can charge merchants for debit-card transactions. The court rejected Dodd-Frank-imposed regulations governing interchange or "swipe" fees set by Visa and MasterCard.

The National Association of Convenience Stores, National Retail Federation, National Restaurant Association, Food Marketing Institute, Miller Oil Co. and Boscov's Department Store LCC filed the initial complaint, NACS v. Board of Governors of the Federal Reserve System, in U.S. District Court, District of Columbia (Washington).

(See File Attachments below to view the full court opinion.)

As reported in a Raymond James/CSP Daily News Flash on Wednesday, U.S. District Judge Richard Leon in Washington ruled that the Fed did not have the authority to set a 21-cent cap on debit-card transactions. Leon said the rule, which has been in effect since Oct. 1 2011, would remain in place pending new regulations or interim standards.

The Fed's "interpretation [of the Dodd-Frank regulations] runs completely afoul of the text, design and purpose of the Durbin Amendment" authored by Senator Dick Durbin, (D.-Ill.) to limit the fees, he wrote.

"The board's final rule permits banks to recover significantly more costs than permitted by the plain language of the Durbin Amendment and deprives plaintiffs of the benefits of the statute's anti-exclusivity provisions," the retailers argued in their complaint.

"The court has vindicated our position that the final Federal Reserve rules on the implementation of the Durbin Amendment were flawed," NACS senior vice president of government relations Lyle Beckwith said in a statement issued by the association. "We look forward to the Fed revisiting their initial analysis that concluded the actual cost of a debit transaction was actually four cents. By following the law and using their own data, the Fed should produce a debit-card rule that lowers these outrageous fees paid by merchants and ultimately consumers."

The opinion said, "Upon consideration of the pleadings, oral argument and the entire record therein, the court concludes that the board has clearly disregarded Congress's statutory intent by inappropriately inflating all debit card transaction fees by billions of dollars and failing to provide merchants with multiple unaffiliated networks for each debit card transaction. Accordingly, the plaintiffs' motion is granted and defendant's motion is denied."

On its website, NACS added, "This fundamentally means that we won on all counts. This case was brought by NACS and several other trade associations, along with several merchants, including NACS retail member and past Chairman Jeff Miller. Our claim was that when the Federal Reserve Board released its final rule on the Durbin Amendment, the debit fees that the largest banks were allowed to charge were far higher than the law would allow. This resulted in an approximate 22-cent per transaction fee--far above the seven- to 12-cent fee originally proposed by the Fed. Along with the higher fee, this created the paradoxical situation where small-ticket transactions conducted with debit cards actually generated higher fees. Also, the ability for merchants to choose between unaffiliated routing was hampered by the final rule."

"Today's decision by the Federal District Court is a victory for consumers and small business around the country and will lead to lower interchange rates for billions of debit card transactions each year," Durbin said in a staement. "The Fed's 2011 decision to bend to the lobbying by the big banks and card giants cost small business and consumers tens of billions of dollars and did not do enough to rein in the anti-competitive, anti-consumer practices of Visa and MasterCard."

He added, "By requiring debit card fees to be reasonable, and by cleaning up Visa's and MasterCard's worst abuses, small businesses and their customers will be able to keep more of their own money and common sense and fairness--not big bank profits--will be the guiding force of the swipe fee system."

National Retail Federation (NRF) senior vice president and general counsel and Merchants Payment Coalition (MPC) chairman Mallory Duncan said in a statement, "Congress clearly told the Fed to introduce competition and transparency into the debit card marketplace by making multiple networks available, so as to reduce swipe fees for merchants and their customers. The Fed failed to do so, and the court rightly ruled against them as a result. Today's decision is the first step in setting these initial wrongs right and will ensure that swipe fee reform is done correctly."

There will be a status conference on Aug. 14 to determine next steps, said NACS.