• Federal District Court Vacates Federal Reserve Board’s Debit Card Interchange Fee and Exclusivity Rules
  • August 29, 2013 | Author: Jeffrey T. Powell
  • Law Firm: Jones Walker LLP - Birmingham Office
  • The Federal District Court for the District of Columbia recently struck down part of the final rule implemented by the Federal Reserve Board ("FRB") regarding limitations of interchange fees and exclusivity requirements for all debit card transactions. These rules were promulgated under Section 1075 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, commonly known as the Durbin Amendment. In NACS v. Board of Governors of the Federal Reserve System, No. 11-2075, slip op. (D.D.C. Jul. 31, 2013), several retailers and trade associations filed suit to challenge FRB's final rules.

    The Durbin Amendment provides that interchange transaction fees, which are defined as any fee charged or received by a payment card network for the purpose of compensating an issuer for its involvement in an electronic debit transaction, must be "reasonable and proportional" to the cost incurred by the issuer of the debit card with respect to a transaction. It then directs the FRB to establish standards to determine "reasonable and proportional" fees and instructs the FRB to determine the incremental cost incurred by an issuer for the authorization, clearance, or settlement of a particular electronic transaction then adjust the fee to allow for actual fraud-prevention costs established by a specific issuer. Moreover, the Durbin Amendment also instructed the FRB to adopt rules that prohibited issuers and networks from entering into exclusivity arrangements or imposing restrictions on the networks through which merchants may route a transaction.

    In 2010, the FRB issued a proposed rule requesting comments for two sets of alternatives regarding interchange fee limits and for exclusivity provisions. First, with regard to interchange fees, the FRB proposed that an issuer was allowed to charge either: (i) up to $0.07 for incremental authorization, clearing, and settlement costs, or in the alternative, (ii) up to a flat cap of $0.12 per transaction. Second, with regard to exclusivity, the FRB proposed that issuers must have two unaffiliated payment card networks for either: (a) each debit card (thereby requiring an unaffiliated network for PIN based transaction and signature based transactions), or (b) each debit card transaction (thereby requiring two unaffiliated networks for PIN based transaction and two unaffiliated network for signature based transactions).

    On June 29, 2011, the FRB issued the final rule. See 76 Fed. Reg. 43394. For interchange fees, the FRB established a flat cap per transaction, but raised the amount up to $0.21 per transaction plus an ad valorem amount of five basis points of the transaction's value. As part of the basis for this increased amount, the FRB included certain costs other than costs for authorization, clearing, and settlement. With regard to exclusivity, the FRB applied the exclusivity prohibitions to the debit card in general, requiring one network for a PIN transaction and another unaffiliated network for signature based transactions.

    The District Court held that the FRB violated the Administrative Procedures Act by not following the express directives of Congress. The Court stated that the Durbin Amendment is unambiguous and the FRB exceeded its authority in adjusting the fee cap to include costs for interchange fees that went beyond incremental authorization, clearing, and settlement costs. Moreover, the court concluded that the FRB ignored the instructions from Congress to require that all debit card transactions must have the ability to be run through two unaffiliated payment networks regardless of whether the transaction was PIN or signature based. The court vacated the FRB's interchange transaction fee cap and network exclusivity regulations as arbitrary, capricious, and not in accordance with law and remanded the FRB to rewrite the regulations. Given the impact of the ruling, the court allowed the current regulations to remain in place temporarily, but invited further briefing from the parties on the appropriate length of stay and procedure to determine the requirements for establishing new regulations.

    While the Durbin Amendment applies only to issuers with $10 billion in assets or more, these regulations have a substantial impact on the debit card network and have been closely watched by the banking industry. We will continue to track the developments of this lawsuit and the FRB's modification to the rules.