Durbin Amendment Interchange Rules Unresolved: Year in Review
The year ended with the Federal Reserve’s debit interchange rules still unresolved.
The Fed’s regulation implements the debit interchange cap and payment network provisions laid out in the Durbin Amendment to the Dodd-Frank Act.
Named after its chief sponsor, Sen. Richard Durbin (D-Ill.), the amendment set a cap on debit interchange for debit card issuers with more than $10 billion in assets and required debit issuers to increase the number of networks it made available.
But U.S. District Court Judge Richard Leon overturned the Fed rules this summer.
In an often sarcastic, 58-page opinion, Leon, who sits on the District Court for the District of Columbia, concluded the Fed had included costs of debit card issuing in its calculation of the cap. The judge said Congress did not intend that in the Durbin Amendment.
“I find that the text and structure of the Durbin amendment, as reinforced by its legislative history, are clear with regard to what costs the board may consider in setting the interchange fee standard,” Leon wrote in the July 31 opinion. “Incremental ACS (authorizing, clearing and settling) of individual transactions incurred by issuers may be considered. That’s it!”
Even though only four credit unions are big enough to be covered by the regulation’s interchange cap, almost all credit unions face a dilemma over how many payment networks they have to have on each card.
Under the currently invalidated regulations, debit issuers have to place two unaffiliated payment networks on each debit card and, in practice, that has usually been a major card brand’s network and one other.
But Leon declared that this requirement does not meet Durbin requirements.
“The board’s interpretation of [the Amendment’s network exclusivity section] cannot be reconciled with the plain meaning or spirit of the statute because it still allows networks and issuers to make only one network available for many transactions,” he wrote. “Indeed, by the board’s own admission, several common transaction types still cannot be authenticated using the PIN method, leaving signature debit the only available option...This result cannot be reconciled with Congress’s goal of providing all merchants with a choice between multiple unaffiliated networks for every transaction.”
Leon disputed each of the Federal Reserve’s three main reasons it said it used to choose the exclusivity provisions, including the “logistical burden” on the payment system required by adding a total of four unaffiliated payment networks to each card.
“That might be the case,” he wrote of the possible difficulty, “but the law does not impose those burdens. In fact, the Durbin amendment does not specify how the board should go about achieving the statute’s requirement.”
He then cited a comment letter the Federal Reserve received and published during the process leading up to the final rule which suggested the regulator require networks to allow PIN networks to process signature transactions, provided they are willing to accept the risk of chargebacks.
Leon’s decision has been stayed pending a higher court deciding an appeal brought by the Federal Reserve which might not be decided before June of 2014.
In its filing on the appeal, the merchants’ side of the dispute acknowledged that the network exclusivity requirements could be met by changing the networks and not requiring all debit issuers to carry four payment networks per card.