Thursday, December 8, 2011
The Durbin Amendment to the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 directed the Federal Reserve Board to limit debit card interchange fees to "reasonable and proportional" issuer costs. The Federal Reserve's final rule, which went into effect Oct. 1, 2011, limits the debit card interchange fee to 21 cents plus a small allowance for fraud prevention.
While the NRF was one of the groups heavily invested in the adoption of the Durbin Amendment, the NRF complaint claims the Federal Reserve exceeded its authority on a few fronts when the Fed issued its final rule for enactment of the amendment.
First, the retailers claim the board adopted an "unreasonable interpretation" of the Durbin Amendment. The NRF contends the Federal Reserve Board did not distinguish between allowable incremental costs and other costs. The NRF believes the board instead "invented a third category of costs not mentioned in the statute."
Next, the NRF alleges the final rule adopted by the FRB should not allow for fraud losses as it does because the Durbin Amendment limits fraud-related costs to fraud prevention. "The Board's fraud loss adjustment permits recovery of fraud losses without regard to any measurers by an issuer to prevent fraud," the complaint alleges.
The retailers also accuse the Fed of attempting to get around the amendment's prohibition of network or issuer exclusivity agreements. The complaint states, "The Final Rule circumvents this provision by providing only one personal identification-number ('PIN') network provider and one 'signature' debit network provider per debit card, and not allowing those networks to provide network services for all transactions performed on the card.
"This outcome means that there will not be a competitive choice among networks on many (and potentially all) debit transactions as the statutory language plainly requires."
The NRF noted interchange fees are the second-highest operating cost for merchants, behind only labor costs, and that interchange fees are rising faster than health care costs. The retailers asked the court for a declaratory judgment setting aside portions of the final rule that create standards for assessing whether interchange fees are "'reasonable and proportional' to the issuer's cost."
The Durbin Amendment directs the Fed to distinguish between incremental costs of an issuer – authorization, clearance and settlement costs – and other costs not specific to the transaction. The retailers allege the final rule went beyond the scope of allowable issuer costs to include processing costs, chargebacks, network fees and transaction monitoring costs – a standard the NRF asked the court to void.
The NRF also asked the court to rule that the networks necessary for routing debit transactions "are arbitrary, capricious, an abuse of discretion and otherwise not in accordance with the law." The retailers claim the Fed exceeded its authority when it included network fees in the allowable recoverable costs.
The NRF stated the law limits the Fed's authority over network fees to ensuring that a network fee isn't used to compensate an issuer for a debit transaction or to get around restrictions in the law. The Board, it said, has no authority to include network fees in Durbin Amendment calculations. The complaint also asks for attorney fees and other relief.
Adam Atlas, a Canadian payment attorney who represents a large contingent of ISOs in the United States, said from an ISO perspective the NRF complaint has little bearing on the ISO community. "ISOs are kind of bemused as they watch while this thing unfolds," he said. "More than anyone they know how to charge merchants for payment services. Ironically Durbin increased ISO [profits]. This complaint is the flip side of Durbin. Merchant agreements give processors a lot of latitude on pricing. That's the marketplace we are in.
"What we're seeing here is that a government directed economy doesn't work. It neither serves the interests of government regulators regulating pricing nor does it serve the interest of the merchant it is supposed to serve."
Atlas believes regulating merchant processing "is more complicated than how many pennies the merchant pays for a transaction." He said if debit card interchange fees could be uncoupled from other line items in a transaction, perhaps it could be regulated, but he sees no way to avoid conflicting with state, local and antitrust laws if there was an attempt to do so.
"There is a price matrix of line items that go into transaction pricing," Atlas noted. "The matrix includes things like batch fees, PCI fees and IRS fees – a whole basket of items. Durbin put a box around one line item. What did not occur was a box around every line item."
He noted groups such as processors, ISOs and gateways that charge transaction fees are not answerable to the kind of federal regulation found in the Durbin Amendment. "They don't answer to the Fed," Atlas said. "The Fed can't regulate any of them except the banks." Atlas added it is ironic the enormous amount of time and expense that went into introducing and passing the Durbin Amendment didn't achieve what the retailers wanted.
Atlas said the fact banks decided to take the highest allowable transaction fee on every debit card purchase, a decision that made previously less expensive transactions more expensive, is something "the retailers should have seen coming."
Atlas also said he is struggling to understand why retailers are challenging the Federal Reserve Board's authority to make rules. "If I were a retailer, I would want the Fed to have more power not less power," he said. 
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