On Wednesday, July 31, the U. S. District Court for the District of Columbia overturned the Federal Reserve Board's rule limiting debit card interchange fees, concluding that the Board had "clearly disregarded Congress' statutory intent." Accordingly, the court granted a motion for summary judgment of plaintiff retailers that accept debit card payments. The case is captioned NACS v Board of Governors of the Federal Reserve System.
The 2010 Dodd-Frank Act's "Durbin Amendment" provides (but only in the case of debit card issuers with assets exceeding $10 billion) that debit card interchange fees charged by an issuer of a debit card with respect to a transaction "shall be reasonable and proportional to the cost incurred by the issuer with respect to" the transaction, and it directs the Board to establish standards. The statute further required the Board to consider only one category of costs, the "incremental cost" incurred by the card issuer for its role in the authorization, clearance, or settlement ("ACS") of a particular transaction; a second category of costs, other costs "which are not specific" to the transaction was not to be considered. The Board was allowed to adjust for fraud prevention costs. Finally, the Board was to adopt rules prohibiting issuers and networks from restricting the number of payment card networks on which a debit "transaction" may be processed to fewer than two unaffiliated networks.
The Board's initial proposed rule would have capped such fees at twelve cents ($.12) per transaction, but its final rule, effective October 1, 2011, permitted an issuer to receive a fee of up to twenty-one cents ($.21) per transaction plus five basis points of the transaction's value. The Board considered, besides incremental ACS costs attributable to specific transactions, other costs specific to individual transactions, which it considered to be a third category of costs. These specific non-ACS costs included fixed ACS costs such as network connectivity and software, hardware, equipment, and labor; transaction monitoring costs; an allowance for fraud losses (the five basis points); and network processing fees. The Board also concluded that the statutory exclusivity requirement did not require issuers and networks to make available two unaffiliated networks for transactions requiring PIN authentication and two unaffiliated networks for transactions requiring signature authentication, but rather only required two unaffiliated networks for each debit card, even if some transactions for authentication reasons cannot be processed on a network requiring PIN authorization.
The court concluded that the statute prohibited Board consideration of any costs other than incremental ACS costs, and, thus, that the Board's consideration of other non-ACS costs specific to individual transactions was not authorized by the statute.
The court also concluded that Congress, in order to promote competition to limit the rise in network fees, intended that each transaction be routed over at least competing networks for each authorization method.
The Board may appeal the court's decision or propose to revise the regulation by lowering the limit on interchange fees. The court scheduled a status conference for August 14, and we then may learn the Board's intentions.