WASHINGTON (5/11/12)--The Credit Union National Association (CUNA) will participate Monday in a call with the Clearing House Association and others to review the amicus brief filed Thursday by U.S. Sen. Richard Durbin (D-Ill.), the primary author of the debit interchange fee proposal in the Dodd-Frank Act, in support of retailers' lawsuit against the Federal Reserve's rule that implements the interchange fee cap.
The Clearing House Association and CUNA are among a coalition of associations representing thousands of small and large financial institutions that in March filed their own amicus brief in the case. Their joint brief underscored that consumers have not seen any pricing benefits for products and services merchants promised when they fought for a government-set cap on what card issuers may charge for their services (News Now
Sen. Durbin filed his brief in the U.S. District Court of the District of Columbia. An amicus brief is 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.
In the brief, Sen. Durbin said he "agrees with the position of the [retailers] plaintiff that the final rule issued by the board is not in accordance with the plain text and intent of the Durbin Amendment in a number of crucial respects and that the rule must be revised to comply with the law."
Durbin's brief made these key points:
- The Fed's proposal in December 2010 was largely consistent with the Durbin amendment, which clearly lays out the authority of the Fed to regulate debit interchange fees. The proposal allowed a 12 cent/transaction debit interchange fee for large issuers.
- Based on lobbying from the financial services industry, the Fed changed the proposal and issued a final rule that is inconsistent with the language and intent of the Durbin amendment in a number of ways.
- The Fed also used the final rule to further its own policy goals of being more generous to issuing banks (the final rule allows 21 cents plus five basis points and a one-cent fraud prevention adjustment/transaction) and providing a compromise between the banks and the merchants.
- The statute directed the Fed to develop standards to determine whether an interchange fee is "reasonable and proportional" by only considering the incremental cost to the issuer for authorization, clearing and settlement (ACS) of the transaction. The Fed exceeded its authority by including other costs that were not specified in the statute. Such costs included those for fixed ACS costs, transaction monitoring, fraud losses, and network processing fees.
- The Fed is wrong that the standards in its final rule are reasonable and proportional by setting a fee for large issuers that is roughly half of the average per transaction interchange fee, 44 cents.
- The Fed's rule does not implement correctly the Durbin amendment's network provisions, which basically prohibit an issuer and payment network from having an exclusive agreement to process the issuer's debit card transactions.
- The Fed misused Sen. Durbin's comment letter to support the provisions of its final rule on exclusivity. Under the final rule, a card must be enabled with at least two unaffiliated networks. However, the rule falls short of the statutory requirements because it does not "guarantee" that networks and issuers will not have contracts or requirements that restrict the number of networks available to process a transaction to less than two unaffiliated networks. (The brief indicates that if a transaction is not compatible with PIN processing, such as some hotel charges, the transaction would not be able to be processed "over at least two unaffiliated networks.")
The retailers' suit alleges the Fed cap is too high. CUNA's and the coalition's briefs argue the cap is too low and that it does not allow debit card issuers to cover their costs and a reasonable rate of return on their investments.
The Fed's initial interchange proposal would have set a per-transaction debit interchange fee cap for between seven cents and 12 cents per transaction. However, after receiving thousands of comments, the Fed decided to add the costs of using debit cards--such as network connectivity, hardware, software, and labor costs--in the final calculations, and it settled on a final cap at 21 cents for issuers having assets of $10 billion or more (News Now
The merchants' suit alleges the Fed's interchange rule exceeds the authority granted to it by Congress, that the final rule is "arbitrary, capricious" and "an abuse of process." (News Now
The Fed, in an April 13 brief, argued that the regulation "complies in all respects" with the authority granted to it by Congress "to promulgate regulations regarding interchange transaction fees in debit card transactions and network exclusivity and routing." (News Now
April 17). The Fed also argued that Congress granted it authority to "consider other costs specific to a particular electronic debit transaction" as it developed the interchange fee regulation."