The Federal Reserve's final rule implementing the Durbin Amendment to the Dodd Frank Wall Street Reform and Consumer Protection Act of 2010 was blasted from both sides in two separate briefs submitted to the U.S. District Court in Washington D.C. The court is considering an effort to overturn the rule, which cut debit card interchange fees in half.
Sen. Richard Durbin, D-Ill., the author of the Durbin Amendment, offered strong support to the plaintiffs in the lawsuit filed by a coalition of merchants, restaurants and retailers against the Board of Governors of the Federal Reserve. The senator complained the Fed's final rule implementing the amendment exceeds the board's rule-making authority, misinterprets his views and improperly implements the amendment's network exclusivity provision.
In a brief supporting neither party in the lawsuit, a group of financial institutions argued the rule unfairly harms consumers and financial institutions while granting a windfall to merchants.
The Durbin Amendment left it to the Federal Reserve to interpret the amendment's direction that debit card interchange fees be "reasonable and proportional" to the issuers' cost. After months of calculations and public comment, the Fed cut the interchange rate for debit cards approximately in half to 21 cents (plus a small allowance for fraud prevention).
Merchants feel the interchange rate is still too high. They believe the Fed exceeded its authority by creating new categories of costs that are not mentioned in the amendment itself but are included in interchange calculations, as well as by allowing debit card issuers to include fraud losses in fraud-related costs when the amendment only allows issuers to collect for fraud prevention. Merchants also believe the rule does not offer a true competitive network choice for many debit transactions.
Sen. Durbin's brief, submitted May 9, 2012, sides strongly with the merchants' effort to overturn the rule. "Sen. Durbin agrees with the position of the Plaintiffs that the Final Rule issued by the Board is not in accordance with the plain text and intent of the Durbin Amendment in a number of crucial respects and that the Rule must be revised to comply with the law," his amicus curiae (friend of the court) brief said.
The senator feels the Fed exceeded its statutory authority with its inclusion of "an unspecified universe of issuer costs" in its interchange fee calculation. He also believes the inclusion of fixed costs, transaction monitoring costs, fraud losses and network processing fees as allowable costs "contravenes the plain language and legislative intent" of his amendment.
Durbin also stated the Fed's decision to cut the debit interchange fee in half does not achieve the amendment's purposes.
"We have ended up with an absurd situation where the Board's Final Rule has approved the charging of significantly higher interchange rates for small-ticket transactions, and has even blessed the charging of a 22 cent interchange fee on the debit card purchase of a 10 cent pencil," Durbin's brief stated.
The brief further claimed, "Congress neither instructed nor empowered the Board to impose its own policy judgments and engage in a 'line-drawing exercise' between the low-fee wishes of merchants and the high-fee desires of the banks, as the Board appears to believe. Congress had made its own policy determination that the Durbin Amendment was needed as 'a response to price fixing by Visa and MasterCard.'"
The brief submitted by the American Bankers Association and numerous other banking and credit union associations, criticized the final rule for costing financial institutions $6 billion to $8 billion in debit interchange revenue losses.
The financial institutions said the merchants' endeavor to overturn the final rule is an attempt to reap the benefits of payment innovation "practically for free." They also called the final rule "an unwarranted, unfair and unprecedented windfall" for merchants.
The banks said the final rule is flawed because it forces below-cost caps on interchange fees while failing to provide a reasonable return for the banks - possibly in violation of constitutional protections against unlawful taking. They also claimed the final rule resulted in reduced financial services and higher fees for consumers.
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