The Federal Reserve Board was ordered back to the drafting table to rewrite the controversial debit card regulations it promulgated to implement the Durbin Amendment to the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act. The order, handed down July 31, 2013, by Judge Richard J. Leon of the U.S. District Court for the District of Columbia, was a firm rebuke of the assumptions and methodologies that led the Fed to cap debit card interchange at 21-cents per transaction.
"It appears that the Board [of Governors of the Federal Reserve] completely misunderstood the Durbin Amendment's statutory directive and interpreted the law in ways that were clearly foreclosed by Congress," Leon wrote in a harshly worded, 58-page rebuke. The judge's decision in the case (Civil Case No. 11-02075) sent shock waves through the financial community. Shares of Visa Inc. stock took a nose dive, ending the day trading at 7.5 percent lower than the previous day's closing price. MasterCard Worldwide share prices were down by about 2 percent.
The ruling also throws into question massive technology investments made by financial institutions and debit card networks in recent years to comply with Regulation II requirements for debit card interchange and network routing. Leon said he would give the Fed time to rewrite the rescinded provisions, "keeping in mind that I am inclined toward [holding off] for months, not years." But most experts expect the Fed to appeal the decision, and "the appeals process is going to take at least two to three years," said industry consultant Paul Martaus.
"This is an extraordinary decision that will have major repercussions for customers of both small and large financial institutions," said Chris Matthews, spokesman for a coalition of financial institution trade associations that had backed the Fed's position. He complained that the Durbin Amendment rules had already provided retailers with a "$6 billion windfall" financed by financial institutions and consumers.
"It is disheartening that the retailers continue to add to their windfall while failing to live up to their promises of lower prices," added Camden R. Fine, President and Chief Executive Officer of the Independent Community Bankers of America.
A group of retailers led by nac NACS (The Association for Convenience & Fuel Retailing), the National Retail Federation and the National Restaurant Association filed suit in 2011 to overturn Reg II, written by the Fed to set standards for capping debit card interchange fees and allowing merchants to choose which debit networks they use. The retailers argued that the Fed disregarded the intent behind the Durbin Amendment, capitulating to banking industry pressures for higher transaction fees and limited network flexibility.
"From the very beginning, retailers and restaurants knew the Federal Reserve Board of Governors had grossly misapplied the swipe fee law, also known as the Durbin Amendment," said Mallory Duncan, NRF Senior Vice President and General Counsel. "They failed to heed Congress' call to set fee standards that were 'reasonable' and 'proportional' to the actual cost of a transaction." Instead they factored costs and considerations that had no direct bearing on the pricing question, he insisted.
Duncan said the result was that many retailers, especially those with small-ticket items, saw interchange fees skyrocket. "Congress clearly told the Fed to introduce competition and transparency into the debit card marketplace," Duncan added. "The Fed failed to do so, and the court rightly ruled against them as a result."
Not so, countered Frank Keating, President and CEO of the American Bankers Association. "The price controls enacted as a result of the Durbin Amendment serve one purpose - further lining the pockets of the nation's big-box retailers at their own customers' expense," he said. "The Durbin Amendment and the court's interpretation will have disastrous consequences for the institutions affected and the communities they serve. This result must be reversed."
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