March 24, 2014
Authored by: Dan Wheeler
In the bankers’ version of March Madness drama, on March 21, 2011, a three judge panel of the U.S. Court of Appeals for the D.C. Circuit handed down a decision that is broadly perceived as a significant victory for banks at the expense of merchants. (The decision is captioned NACS f/k/a National Association of Convenience Stores, et al. v. Board of Governors of the Federal Reserve System.)
The issue was the legality of the Federal Reserve’s rules implementing the “Durbin Amendment” portion of Dodd-Frank. That portion of the legislation is generally viewed as having required regulatory caps on the interchange fees that can be charged to merchants. Merchants criticized the Federal Reserve’s rules for allowing interchange fees at a level much higher than allowed by Dodd-Frank and for allowing interchange competition rules less strict (and thus more favorable to banks) than permitted under Dodd-Frank. The merchants essentially won this argument at the lower court, the U.S. District Court for the District of Columbia. The Court of Appeals reversed the district court on all key issues. The merchants can still appeal the decision to the entire D.C. Circuit appeals court, or to the U.S. Supreme Court. However, based on our review of this decision, such an appeal appears to have a limited chance of success. And it seems highly unlikely that either party in Congress is willing to legislate any further on interchange fee issues.
To understand the scope and effect of the decision, a brief review is in order. The Dodd-Frank Financial Reform Act passed in 2010 included a provision now widely known as the Durbin Amendment, due to its authorship by Illinois Sen. Richard Durbin. It is widely believed that Senator Durbin authored the provision at the request of the merchant Walgreens, one of his important constituents. One portion of the Durbin Amendment applies to banks and credit unions with over $10 billion in assets. For those institutions, the Federal Reserve was required to promulgate regulations to cap interchange or “swipe” fees on debit-card transactions at a level “reasonable and proportional” to the cost the financial institution actually incurs. Another part of the Durbin Amendment required the Federal Reserve to promulgate regulations to ensure that merchants had at least two unaffiliated networks through which bank account transactions could be completed by using the correct routing numbers.
In response to the Durbin Amendment, the Federal Reserve initially proposed capping interchange fees at about $0.12 per transaction. Then, after considerable study, analysis and uproar from the banking industry that argued with some force that a $0.12 rate would force them to operate at a loss, the Fed’s final regulation capped interchange fees at approximately $0.24 per debit transaction. The Fed also provided in its final regulations that debit cards may use one PIN debit network and one signature debit network, as long as the two networks were not affiliated.