Opponents of the Durbin amendment's cap on debit card interchange may find repealing the legislation an easier battle than fixing it.
The Durbin amendment made it very clear that small debit card issuers with assets of less than $10 billion were not supposed to be covered by the debit card cap. "This subsection shall not apply to any issuer that, together with its affiliates, has assets of less than $10 billion and the board shall exempt such issuers from regulations" flowing from the amendment, the law says.
But while the amendment was clear in its intent to exempt small issuers, such as a credit unions, from the cap, it did not clearly lay out the mechanisms for making sure that exemption existed in the market as well as in law.
Part of the problem in creating a workable exemption centers with the payment processing networks. While the amendment allows these networks to establish two separate interchange schedules, one for debit issuers subject to the cap and another for those exempted, it does not require that they do so. And some networks may find good reasons not to offer two interchange schedules.
In presenting the proposed rule that would implement the law, staffers from the Federal Reserve Board acknowledged that there could be market reasons a processing network might choose not to offer two interchange schedules, thus removing any practical exemption for small issuers.
A further problem comes in the amendment's language itself. One part of the amendment forbids "discrimination" against debit cards on the basis of interchange rates-in other words, a merchant cannot decline to take a debit card from an exempted small issuer in favor of one from a capped larger issuer. But the amendment also gives merchants complete autonomy to choose payment networks to route the transaction. So, even if they take a debit card from an exempted small issuer, if they choose to route the transaction through a network that does not offer two debit interchange schedules, the exemption also disappears as a practical matter.
Fixing either of these two holes in the law to make the exemption meaningful very well might be more difficult that just repealing the law. Requiring payment networks to offer two debit interchange schedules will draw another whole industry into additional federal regulation and give the federal government a still larger role in fixing prices, as would requiring merchants to process debit card transactions from exempted cards issuers over a payment network that offered an exempted and higher interchange rate. Lawmakers hungry to cut back some of the Obama administration's legislative agenda might find repealing the Durbin amendment to be a relatively easy win, while amendment supporters might find it a difficult measure to defend.