Thursday, June 23, 2011
The Durbin Amendment to the Dodd Frank Wall Street Reform and Consumer Protection Act of 2010 requires the Fed to set debit card interchange rates that are "reasonable and proportional to the actual cost" for card issuers with more than $10 billion in assets. On Dec. 16, 2010, the Federal Reserve Bank responded to the Durbin Amendment with a proposed new rule that would cap debit card interchange fees at 12 cents.
The Fed has been taking public comment on the proposal and revising it in preparation for the release of the final rule. The financial services industry has been waiting anxiously for the Fed's decision. The wait is making debit card issuers anxious as the new rule is required to take effect July 21.
Not only are issuers uncertain of the impact the rule will have, as a 12 cent cap could mean up to a $20 billion loss for banks by some estimates, but they are also concerned about the time it will take to set up and implement the new rule.
The Fed's initial rule called for reducing the debit card interchange fee 75 percent – from an average fee of 44 cents to a new rate of 12 cents. This spring, Minnesota's TFC National Bank sued in federal court to stop the Durbin Amendment from going into effect on grounds that the fee cap amounts to an unlawful taking of property and is therefore unconstitutional.
A federal district court dismissed the suit, saying it cannot block a rule that hasn't yet been published. In oral arguments before a federal appeals court last week, TFC attorney Timothy Kelly estimated TFC losses would amount to more than $80 million in the first year if Durbin goes into effect. Kelly told the court the bank needs a debit card interchange rate of 39.6 cents just to make a 4 cent profit after expenses.
"If you assume the Fed is going to follow the statute with fidelity, it is never going to allow us to recover our costs,” Kelly said. “To the contrary, 20 of the 24 costs categories are excluded." Kelly speculated the Federal Reserve's final rule would add 1.5 cents to the final debit card interchange rate to pay for fraud prevention. He also asserted the new interchange rate should allow banks to add back the cost of Visa Inc. processing fees.
These are precisely the issues the Federal Reserve Board is expected to discuss when it meets next week, presumably with the proposed final rule before it. The meeting can be seen live on the Federal Reserve's website at www.federalreserve.gov . 
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