WASHINGTON (3/16/12)--The Credit Union National Association (CUNA) Thursday joined a broad coalition of trade associations representing thousands of small and large financial institutions to file an amicus brief in a lawsuit brought by merchants against the Federal Reserve Board's rule that sets a debit interchange fee cap.
The joint brief describes how small and large financial institutions are harmed by the Fed's tight fee ceiling. It underscores that consumers have not seen any pricing benefits for products and services promised by the merchants when they were fighting for a government-set cap on what card issuers may charge for their services.
While the merchants' suit charges that the Fed cap is too high, the amicus brief counters that it is, instead, too low and does not allow debit card issuers to cover their costs and a reasonable rate of return on their investments. An amicus brief can be filed in a court case by interested parties not named in a lawsuit. The court can accept or reject the brief as part of the case record.
The Fed was charged with setting the debit fee limit under provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The Fed's final rule, which became effective in October, caps debit interchange fees for issuers with assets of $10 billion or more at 21 cents.
The regulation also allows card issuers to charge an additional five basis points of the value of the transaction to cover fraud losses. An extra penny may also be charged by financial institutions that are in compliance with the Fed's fraud-prevention standards.
The Fed rule is not meant to apply to issuers with less than $10 billion in assets, which means nearly all credit unions are exempt. However, the brief notes that there is serious doubt whether this exemption will work in practice, because merchants will have an incentive to steer transactions toward lower-fee debit cards from the bigger issuers.
The CUNA joint brief asks the U.S. District Court for the District of Columbia to reject the merchants' suit.
"They're correct that the final rule is flawed--but not for any of the reasons they claim," the brief says. It goes on to argue the rule sets "draconian price caps" that don't allow card issuers to pursue their "statutory and constitutional right to a reasonable rate of return on their investments."
On the other hand, CUNA and its partners argue, industry data cited on the Electronic Payments Coalition website indicate that retailers have saved $825 million since the interchange cap came into effect, and Bloomberg Government has estimated that retailers will bring in an additional $8 billion in revenues per year as a result of the interchange changes.
"Not content with the annual $6 billion-$8 billion in extra profits they have secured, giant retailers are now suing to increase their windfall," the brief charges.
The coalition filing the amicus brief also includes the Independent Community Bankers of America, National Association of Federal Credit Unions, Midsize Bank Coalition of America, Consumer Bankers Association, National Bankers Association, The Clearing House Association, American Bankers Association, The Clearing House Payments Company, and The Financial Services Roundtable.