Compliance Blog

Mar 24, 2014

D.C. Circuit Decision is a Big Win in the Debit Interchange Battle; Free Kick; Two Helpful Webcasts

Written by Ricardo Piñeres, Regulatory Compliance Counsel

Friday was supposed to be a quiet day for the NAFCU Compliance Department, but the U.S. Court of Appeals for the D.C. Circuit had other plans for us.  The court released its opinion in the debit interchange case (NACS v. Board of Governors of the Federal Reserve System) Friday morning, and lots of us at NAFCU spent Friday reading and analyzing the opinion so that we could give you the most important information.  Judge David Tatel, writing for the three-judge panel that also included Judges Harry Edwards and Stephen Williams, penned a concise 38-page opinion that largely overturned Judge Richard Leon’s District Court ruling from last year that had favored the merchants.


Interchange Fee

The bulk of the opinion is spent dissecting whether or not the Federal Reserve properly exercised its power in interpreting the Durbin Amendment and whether or not the costs that the Federal Reserve included in its interchange fee calculation were reasonable to include in the fee, as per the legislative language.  After going through several levels of legal and grammatical analysis, the court held that the Federal Reserve crafted a rule that largely fell within the constructs of the Durbin Amendment.

Judge Tatel spent several pages discussing the modern legal theories regarding legislative construction and the important role that punctuation plays in determining the intent of the legislature.  The outcome of this analysis was the key to the opinion’s decision on interchange fees.  If the panel agreed with the lower court ruling and the merchants’ reading of the Durbin Amendment’s language and grammar, then the Federal Reserve would be deemed to have promulgated a rule that exceeded Congressional intent in allowing for card issuers to recover more than just the variable costs of a debit transaction.

After going through this analysis and quoting from such classics as E.B. White and William Strunk’s The Elements of Style and Lynn Truss’s Eats, Shoots & Leaves, the panel held that the Federal Reserve was within its right to include more than just the variable costs.

Because of this holding, the panel also had to go through an analysis as to whether each one of the individual, “non-variable” costs that were included in the Federal Reserve’s interchange fee calculation.  The panel held that the following costs were appropriately included in the fee calculation: (1) fixed authorization, clearance, and settlement costs; (2) network processing fees; and (3) fraud loss costs.

The panel believed that transaction monitoring costs could reasonably be calculated as part of the fee, but also believed that the Federal Reserve had not adequately explained its reasoning for including the transaction monitoring costs.  Therefore, the panel remanded the issue of the transaction monitoring costs to give the Federal Reserve an opportunity to explain its rationale for including the costs in the interchange fee calculation.


Routing & Anti-Exclusivity

Judge Tatel’s opinion for the panel stated early on in its section regarding the routing and anti-exclusivity provisions of the Federal Reserve’s rule that the merchants’ arguments had a “steep hill to climb.”  This is because the panel felt that a plain text reading of the Durbin Amendment seemed to align with the Federal Reserve’s reading of the provisions, thus allowing for the rule’s requirement that issuers activate two unaffiliated networks regardless of the method of authentication (PIN or signature).  After a fairly short analysis, the panel held that the merchants’ argument stating that cards needed to be activated on at least two unaffiliated networks per authentication method did not hold muster.


What does it all mean for credit unions

In the short term, credit unions will be able to continue administering their debit card programs in the same manner in which they have been since the Federal Reserve’s rule was promulgated.  Furthermore, the debit interchange fee calculation will remain unchanged while the Federal Reserve decides how to move forward with regards to the inclusion of the transaction monitoring costs.

NAFCU will continue to monitor the debit interchange legal battle, and will provide further updates, as they become available.  For further information on this issue, please visit NAFCU’s webpage devoted to the debit interchange rule.


Free Kick.  Being a fervent supporter of a football team has its highs and lows.  This weekend brought one of the lowest lows possible, as my beloved Arsenal were utterly humiliated by Chelsea.  The 6-0 tragedy has me too depressed to write much about football, but I did want to mention two things related to that match.

First, how can a refereeing crew make such an egregious mistake in so clearly sending off the wrong player by handing Kieran Gibbs a red card for a foul committed by Alex Oxlade-Chamberlain?!  The decision made absolutely no impact on the ultimate outcome, but it is a mistake that no refereeing crew should ever make.  Hopefully, the crew is properly disciplined for such a poor performance.

Lastly, I do want to tip my hat to Arsene Wenger.  While Saturday’s outcome undoubtedly left a sour taste in his mouth, he deserves to be congratulated for managing his 1,000th game at Arsenal.  It’s been a pleasure watching his teams fill Highbury and the Emirates with attractive and fundamentally-sound football for almost 20 years now!


Two Helpful Webcasts

Risk-Based Capital Rule: How NCUA’s Proposal Will Impact You

Delve into NCUA’s risk-based capital proposal and learn how it could impact your operations both immediately and long-term. Register by April 3 to save $100.


Fair Lending II: How NCUA Guidance and the CFPB’s Focus Affect You

Gain insight into the latest guidance NCUA has issued regarding fair lending, and the best practices for implementing it. You’ll also learn the CFPB’s expectations for fair lending risk management practices. Register by April 16 to save $100.