Updated March 2014
What you should know now
On March 21, 2014, the United States Court of Appeals for the District of Columbia overturned the District Court's decision that shot down the Federal Reserve's rule limiting the fees that financial institutions can charge merchants for processing debit card transactions. This marks a tremendous victory for our nation's credit unions.
The appellate court:
- Ruled in favor of the Federal Reserve Board on almost all of the issues presented to it. They did remand the issue of transaction-monitoring costs in order for the Board to better explain themselves, noting that they "may well be able to" but that the Board "has yet to do so."
- Rejected the district court’s analysis and concluded that the Board reasonably interpreted the Durbin Amendment as allowing issuers to recover some costs in addition to incremental ACS costs.
- Rejected the district court’s analysis regarding network exclusivity, deferring “to the Board’s reasonable interpretation of section 920(b) and reject[ing] the merchants’ challenge to the anti-exclusivity rule.”
The decision can be found here.
Now the merchants may petition the Court of Appeals for rehearing or rehearing en banc, or they may petition the Supreme Court for certiorari. NAFCU applauds the appellate court for their hard work and favorable decision. NAFCU will continue to monitor this issue and advocate on behalf of members to preserve a reasonable return for credit unions from interchange fee income. We will provide updates as necessary.
Background on this issue
During the 112th Congress Senators Jon Tester (D-MT) and Bob Corker (R-TN) introduced S. 575, The Debit Interchange Fee Study Act of 2011, a bill that would have delayed the implementation of the Durbin debit interchange price caps for two years and require the Federal Reserve, FDIC, OCC and the NCUA to jointly study the true impact of regulating debit interchange and report back to Congress.
The bill's language was modified under an amendment that would delay the implementation of the Durbin interchange price caps for 12 months with a 6-month study of the proposed rule by the Federal Reserve and functional regulators (including the NCUA). If the Federal Reserve and one other regulator found that certain triggers were met where financial institutions or consumers may be harmed by the current proposal, the Federal Reserve would then have 6 months to rewrite and implement a new rule where all of the costs associated with debit transactions would have to be considered. Furthermore, every two years the Federal Reserve would have to report to Congress on the effectiveness of the exemption to the price caps for those financial institutions with less than $10 billion in assets.
Due to a filibuster threat from Senator Richard Durbin (D-IL), the Tester-Corker amendment required a 60 vote threshold to pass. Unfortunately, the amendment failed to clear the threshold by 54-45 votes. While the amendment vote was a significant setback, NAFCU continues to work to mitigate the impact of debit interchange rules on credit unions.
In June of 2011, the Federal Reserve released its final rule which deems the maximum interchange fee that an issuer may receive for an electronic debit transaction, the sum of 21 cents per transaction, plus 1 cent if certain fraud policies are in place and 5 additional basis points to take into account fraud costs. The rule went into effect on October 1, 2011.
After the rule was imposed, as NAFCU predicted, several big banks implemented new fees on the use of debit cards. This decision has led to an overwhelming outcry among consumers who were hit with the fees and forced some banks to roll back those fee increases as their customers took their business elsewhere. In response to this unintended, yet foreseen consequence, Representatives Jason Chaffetz (R-UT) and Bill Owens (D-NY) introduced H.R.3156, the Consumer Debit Card Protection Act, to repeal the Durbin debit card interchange price control amendment to the Dodd-Frank Wall Street Reform and Consumer Protection Act.
The Electronic Payments Coalition, of which NAFCU is a member, has launched a campaign to show the results of a recent study proving exactly what we predicted: retailers paid much less in interchange fees while passing no savings on to consumers. Data shows that the retail industry has already seen $825 million in savings since the government regulation on debit cards went into effect. You can learn more at http://wheresmydebitdiscount.com/.
On July 31, 2013, the Federal Judge Richard Leon of the District Court for the District of Columbia ruled to overturn the Federal Reserve's rule limiting the fees that financial institutions can charge merchants for processing debit card transactions (NACS, et al., v. Board of Governors). Essentially, the court invalidated the Federal Reserve's reasoning for including a broad range of fees in the final rule and invalidated non-exclusivity provisions. (Read the ruling.)
On August 14, Judge Leon set a tight schedule for the Federal Reserve to revise its debit interchange cap rule, asking that they reconvene in one week’s time for the Federal Reserve to present a plan for issuing an interim final rule. On August 21, after informing Judge Leon of its intention, the Federal Reserve Board filed an appeal of the court’s decision. In addition, the Fed Board filed an expedited appeal and requested a stay of the court’s decision pending the appeal. NAFCU fully supports the Fed’s decision to appeal.
The request by merchants and the Federal Reserve Board for an expedited briefing and consideration of the Fed’s appeal of the district court ruling to vacate the Fed’s debit interchange rule was granted. The expedited schedule gave the Fed until Oct. 21 to submit its brief in the appeal. Amici – which include NAFCU – also had until Oct. 21 to submit their brief supporting the appeal.
On August 26, the Fed filed a consent motion for a stay of Leon’s decision, pending appeal, with NACS (the merchants) agreeing that there should be a stay pending appeal. On August 28, additional briefs were filed in the case. NAFCU, with other financial industry trades, filed an amici brief to Federal Judge Richard Leon on whether or not the Federal Reserve should issue an interim or expedited final rule as requested in his debit card interchange fee ruling.
In the amici brief, NAFCU argued:
- the court lacks the authority to require the Fed Board to issue an interim or expedited rule;
- the court should not require an interim or expedited rule and rushing to do so will harm all parties involved, including consumers, and will threaten the current electronic debit card payments system; and
- an order requiring the Fed to issue an interim or expedited rule will likely lead to more litigation.
NAFCU strongly supported keeping the status quo in place so as to not disrupt or confuse the financial sector with a new interchange rule. Both the merchants group and Federal Reserve also submitted briefings to Judge Leon and both agreed that a stay of the status quo is the best option in this case. On September 20 the stay requested by all parties was granted.
On October 21, the Federal Reserve submitted its brief in the appeal. That same day NAFCU and other amici also filed a brief in favor of overturning the ruling invalidating the Federal Reserve Board’s debit interchange rule. NAFCU wants to see the cap on debit interchange fees raised. The Federal Reserve’s final rule limits debit interchange fees to 21 cents per transaction plus 1 cent for fraud costs. This cap applies to debit card issuers having more than $10 billion in assets, but NAFCU notes that fees to smaller institutions are already on the decline and are expected to drop further due to market forces.
In addition to the points made in the brief filed on August 28, the amici brief supporting the appeal notes that the court and the Federal Reserve have departed from congressional intent in their interpretations of interchange fees being “reasonable and proportional” to a transaction cost, and in terms of the network non-exclusivity clause. Enabling additional networks on debit cards, as interpreted by the court, would force issuers to develop currently non-existent technology and exponentially drive costs up for issuers of all size.
On November 20 the merchants filed their appeal brief supporting Judge Leon's decision in July to vacate the Federal Reserve's rule limiting the fees financial institutions can charge for processing debit card transactions.
Appeals court upholds Fed's 21-cent cap on retailer 'swipe fees' (Los Angeles Times, March 21, 2014)
Banks' Victory on Swipe Fees Seems Likely to Hold Up (American Banker, March 21, 2014)
NAFCU Hails Overturning of Lower Court Ruling on Debit Interchange Case (March 21, 2014)
NAFCU Statement Regarding Oral Arguments on Debit Interchange Rule Before U.S. Court of Appeals (January 17, 2014)
NAFCU Statement on Stay Ruling by D.C. U.S. District Court (September 20, 2013)
FCU Defends Members, Consumers in Debit Interchange Fee Case (August 28, 2013)
NAFCU Statement on Interchange Ruling by D.C. U.S. District Court (July 31, 2013)
Interchange Comment Letters
6-7-11 Reid-McConnell Tester-Corker Amendment # 392 Support Letter
5-16-11 Reid-McConnell-Debit Interchange Data Security Comment Letter
5-2-11 Reid-McConnell Interchange Comment Letter
3-23-11 Boehner-Pelosi H.R. 1081 Comment Letter of Support
3-23-11 Reid-McConnell S. 575 Comment Letter of Support
2-16-11 Capito-Maloney Interchange Hearing Comment Letter
1-21-11 Johnson-Shelby Interchange Repeal Comment Letter
1-21-11 Bachus-Frack Interchange Repeal Comment Letter
11-15-10 Pelosi-Boehner Data Security Comment Letter
11-15-10 Reid-McConnell Data Security Comment Letter
7-29-10 Altmire-Fallin Interchange Hearing Comment Letter
6-28-10 Pelosi-Boehner Regulatory Reform Interchange Comment Letter
5-24-10 Pelosi-Boehner Regulatory Reform Interchange Amendment Comment Letter
5-13-10 Reid-McConnell Durbin Interchange Amendment Comment Letter
5-11-10 Reid-McConnell Durbin Interchange Amendment Comment Letter
5-04-10 Reid-McConnell Durbin Interchange Amendments Comment Letter
4-23-10 Reid-McConnell Interchange Comment Letter