The U.S. District Court ruled today in favor of merchants in a challenge to debit card interchange rules set by the Board of Governors of the Federal Reserve System.
The decision blasts the board for not following the law as passed by Congress, saying that it failed to set fees that are “reasonable and proportional to the cost incurred by the issuer with respect to the transaction,” and failed to provide merchants with multiple unaffiliated networks for each debit card transaction.
These failures inflated the debit card transaction fees imposed on merchants by billion of dollars, the summary judgment says.
The merchants who brought the challenge include NACS (formerly the National Association of Convenience Stores), the National Retail Federation, the Food Marketing Institute, Miller Oil Co., Boscov’s Department Store and the National Restaurant Association.
‘This fundamentally means that we won on all counts,” NACS says on its website.
The Durbin Amendment to the Dodd-Frank Wall Street Reform and Consumer Protection Act, passed in July 2010, required the Federal Reserve board to determine debit card fees that reflect the actual cost incurred with respect to an individual transaction. The board was asked to determine costs incurred in the authorization, clearance or settlement of a particular electronic debit transaction.
Congress also asked the board to determine other costs not specific to a particular electronic debit transaction. These costs were to be excluded from the interchange or “swipe” fees card issuers would be allowed to charge merchants.
After these costs were determined, the board could later factor in or adjust the fee to allow for other costs, such as those for fraud-prevention. Instead, the board took it upon itself to add those and other expenses into the actual cost.
The ruling says that it the board’s final rule “not only fails to carry out Congress’s intention; it effectively countermands it!”
The judgment says that the board “not only ignored terms such as ‘distinguish between,’ ‘other,’ ‘specific,’ ‘particular,’ ‘incremental,’ and ‘authorization, clearance, or settlement’—which provide clear guidance, but also shoehorned a whole array of excluded costs into the interchange fee standard.”
Congress also asked the Federal Reserve board to regulate network fees by preventing exclusivity arrangements between dominant card networks and issuers.
It did not and defended its inaction by saying that the law did not state that merchants must have routing choices for each transaction. Those types of arrangements resulted in $4.1 billion in network fees in 2009, due in large part to the lack of competition, the ruling says.
“Congress intended to put an end to exclusivity arrangements and increase merchants’ choice among debit processing networks, not restrict that choice or even preserve the status quo,” the judgment says.
Comments in the ruling seem to suggest that the board may have taken sides on the matter. The judgment says that the board defended its non-exclusivity regulation by pointing out that it is not “the most aggressively pro-merchant position” that it could have taken.
“The board obviously misses the point!” the judgment says. “It is not about whether the rule favors merchants or issuers; rather, it is about whether the rule implements Congress’s will.”
The regulations imposed by The Durbin Amendment apply only to issuers with assets exceeding $10 billion.