A group of retailers and retail associations filed suit in Federal Court in Washington DC to prevent enforcement of the Federal Reserve’s recent debit card interchange rules. The plaintiffs include several retailers, the Food Marketing Institute, the National Retail Federation, and the National Association of Convenience Stores. The lawsuit alleges that the Federal Reserve’s Final Rule establishing debit interchange transaction fees fails to comply with the Durbin Amendment.
In the lawsuit, which was filed in the U.S. District Court for the District of Columbia on November 22, 2011, the plaintiffs request the court to a judgment that portions of the Federal Reserve Final Rule are “arbitrary, capricious, an abuse of discretion, and otherwise not in accordance with law.”
In particular, the suit alleges that the Federal Reserve did not comply with certain mandates of the Durbin Amendment, stating:
The Durbin Amendment directs the Board to establish standards for debit card “interchange transaction fee[s].” Specifically, the statute directs the Board to prescribe regulations ensuring that the “amount of any interchange transaction fee that an issuer may receive or charge with respect to an electronic debit transaction shall be reasonable and proportional to the cost incurred by the issuer with respect to the transaction.” In prescribing the regulation, the statute directs the Board to distinguish between the “incremental cost” incurred by an issuing bank “for the role of the issuer in the authorization, clearance or settlement of a particular debit transaction,” which cost shall be included in the Board’s interchange fee standard, and “other costs incurred by an issuer which are not specific to a particular electronic debit transaction,” which costs shall not be considered in setting the standard.
Here’s why the retailers argue that the Fed failed to meet these requirements imposed by the Durbin Amendment:
After receiving extensive comments, including numerous objections from the banking community, the Board reversed course in its Final Rule. The Board rejected its previous view that the only allowable costs were the costs of “authorization, clearing and settlement of a transaction,” and instead adopted a regulation that included in its calculation many additional costs, both fixed (or non-“incremental”) and variable, associated with an issuing debit card operations. The end result of the Final Rule was to essentially double the allowable costs recoverable by an issuing bank under the more generous of the alternative standards proposed in the NPRM. The Final Rule sets a per transaction fee applicable to purchases made with a debit card, equal to 21 cents per transaction plus an ad valorem adjustment for fraud losses of 5 basis points of a debit card transaction’s value. The Final Rule became effective on October l, 2011.
In vastly expanding the categories of recoverable costs and thus the allowable debit interchange transaction fee, the Final Rule exceeds the statutory authority delegated to the Board by the Durbin Amendment and is an unreasonable interpretation of that statute. It is thus invalid under the Administrative Procedure Act in several respects.
A representative of the National Retail Foundation argued that “it’s almost as if the banks and the Fed were working hand-in-glove to block the genuine competition and common-sense price reductions Congress directed.” The end effect, claim the retailers, is that debit card swipe fees have increased for many small ticket purchases.
A copy of the complaint is shown below:
NRF Debit Card Suit