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April 19, 2012 – The Federal Reserve acted within its discretion when it considered certain fixed costs, transaction verification costs and others in setting a maximum interchange fee on debit-card transactions, the Fed said in its April 13 reply brief to a suit filed by merchants late last year.

The suit challenges the way the Fed decided the fee and claims the fee cap – 21-22 cents per transaction, plus 5 basis points to cover a portion of fraud losses – is still too high.

The requirement to set a limit on interchange fees was set under the Dodd-Frank Act's debit interchange provisions. The provisions were proposed and won by Sen. Richard Durbin, D-Ill., before the Senate cleared the package that went on to a House-Senate conference committee before being passed in both chambers.

The merchants say the Dodd-Frank Act prohibits the Fed from considering in its fee limit four types of costs: fixed costs of authorization, clearance or settlement; transaction monitoring; fraud losses; and network processing fees. But in last week's reply, the Fed said the law does not "unambiguously" bar inclusion of those factors. The Fed Board, pointing to the discretion it is granted under the law, "acted reasonably" in taking those costs into account.

Last month, NAFCU and eight other financial industry groups jointly filed an amicus brief that supports neither side in this suit but which argues that the current fee cap is too low.

NAFCU opposed the Durbin amendment from its outset. The final rule, as provided by the Dodd-Frank Act, applies only to institutions with more than $10 billion in assets, but NAFCU has warned that all institutions will eventually come under the Fed's cap as a result of market forces.

The merchants are also challenging the Fed's rule provisions dealing with the law's limits on network exclusivity.

The merchant-plaintiffs have until May 11 to file their response to last week's filing. The Fed will then have until June 1 to reply.