The Senate voted yesterday on S.A. 392, a proposed amendment to modify and delay the debit interchange fee limitations enacted by the Durbin Amendment of the Dodd-Frank Act. Chairman Bernanke had previously announced that certain of the deadlines for interchange rules set in the Dodd-Frank Act would not be met, given the substantial number of comments received in response to the Fed's proposed rules. In light of this vote and in the absence of further Congressional action or court orders in connection with litigation challenging the constitutionality of the law, the Durbin Amendment will become effective on July 21, 2011, and implementing rules could follow at any time.
A response to the Fed's proposal that electronic debit interchange fee limitations required by the Durbin Amendment be implemented through a 12-cent per transaction cap, the amendment considered by the Senate would have delayed implementation of the Durbin Amendment provisions until further study of interchange fees could be made. As part of the proposed study, the Tester amendment would have required an analysis of:
- Fixed and incremental costs of issuers and networks related to debit interchange transactions and the operation of debit interchange transactions (including the direct and indirect costs associated with fraud prevention and mitigation);
- The consumer impact of regulation of debit interchange fees; and
- The effectiveness of the Durbin Amendment exemptions applicable to small issuers, certain government programs and prepaid cards.
Most importantly to issuers, the Tester amendment would have suspended the Fed's proposed regulations and enabled Congress to determine that new rules should be issued with due consideration to findings reflected in the required study.
Although the Fed has delayed finalizing any regulation related to electronic debit interchange fees, it appears now that the Fed is poised to proceed. It is unclear what the Fed will do and how it will respond to the 11,000 comment letters received on the proposed 12-cent cap, but many industry analysts believe the Fed may raise the cap in the final rule.
Two alternative rules have been proposed by the Fed as methods to implement the Durbin Amendment limitations: the first requires covered issuers to calculate their "average variable cost" for authorization, clearance and settlement of electronic debit transactions, subject to a cap of 12 cents per transaction or rely on a 7-cent per transaction safe harbor; the second simply establishes a 12-cent per transaction cap applicable to all covered issuers.
While the rule isn't final, and issues other than interchange fee rates must be resolved (e.g., network exclusivity), the focus on litigation over the constitutionality of the Durbin amendment now takes on added importance.
Analysis of legislation impacting debit interchange fees will continue as the Fed moves toward a final rulemaking.