The case deciding whether credit unions will have to reissue their debit cards inched closer to a conclusion Nov. 20.
Merchants defending U.S. District Court Judge Richard Leon's decision overturning the Federal Reserve's Debit Interchange Regulation filed arguments defending Leon's decision before U.S. Court of Appeals for the District of Columbia Circuit.
In many ways, the appeal briefs paralleled the arguments presented to the lower court, but significantly, the merchants were more explicit about not necessarily demanding debit issuers reissue their existing cards.
Leon's July 31 opinion against the Fed had left the door open to the possibility that credit unions and other debit issuers might have to reissue debit cards, swapping out existing cards that carry the brands of only two debit processing networks for cards that carry the brands of four different debit processing networks, at a potentially enormous expense.
But the merchant's appeal brief suggested that this would not necessarily have to be the case.
“While the Board could ensure compliance with this provision by requiring multiple unaffiliated networks for each method of authentication, it might choose to do so through equally viable non-card based alternatives, such as taking down the prevailing, artificial wall between signature and PIN networks so that every network can process either type of transaction,” the merchants wrote in their argument.
Similar ideas had arisen during discussion with the court after Judge Leon's decision, but the brief made the idea explicit.
However, the merchant coalition, which includes trade associations and individual large retail firms, did not abandon their argument that to conform with requirements of the Durbin Amendment, the Fed would have to draft regulations that allow merchants a choice of at least two networks to route each debit transaction.
This runs counter to the Fed's interpretation of the law which took a card-based approach, declaring it enough for issuers to provide two different payment networks per card, not per transaction.
The retailers maintained their insistence that the law mandates regulation of debit processing by transaction, but suggested that different avenues might be available to comply with the requirement.
“I think our position in the appeal brief reiterates our position before the District Court,” said Douglas Kantor, an attorney with the firm Steptoe and Johnson, which represents some of the retailers in the case.
“We have long recognized that the Federal Reserve Board has some choices about how it implements the Durbin Amendment's requirements on network exclusivity,” he said. Kantor added that if the Fed chose to do so by taking down the barriers between PIN and signature debit networks, the merchants would find that acceptable.
He also countered the notion merchants and debit issuers were fighting over a payment system entering an era of declining popularity as the industry begins to move to chip-based EMV transactions.
Kantor pointed to the care he said Sen. Richard Durbin (D-Ill.) used when drafting the statute, not to tie it to any one method of authentication.
“No matter how they are authenticated,” he said, “they will still be debit transactions and still subject to the law.”
Most of the retailer arguments concerning the cap itself reflected the group’s arguments to Leon, and criticized the Fed for not interpreting the Durbin Amendment according to its clear language.
“Given the shaky foundation on which the Final Rule rests, it is no surprise that several particular costs allowed therein are explicitly forbidden by the Durbin Amendment,” the retailers wrote. “The vast majority of additional costs permitted by the Board’s expansive interpretation of allowable costs—such as fixed equipment, hardware and software costs—are incurred by issuing banks whether or not a particular transaction ever takes place.”
The Federal Reserve now has until December 4 to file a response to the merchant's argument and oral arguments have been scheduled in the case for Jan. 17, 2014.