Fed Catered Too Well to Credit Card Companies

     (CN) – The Federal Reserve “clearly disregarded Congress’s statutory intent by inappropriately inflating all debit card transaction fees by billions of dollars,” a federal judge ruled.
     NACS, formerly known as the National Association of Convenience Stores, led five other entities in the lawsuit over the Fed’s response to U.S. Sen. Dick Durbin’s amendment to the Dodd-Frank Wall Street Reform and Protection Act of 2010.
     The Illinois Democrat’s plan sought to provide relief from escalating merchant fees associated with debit card use, which had risen an astounding 234 percent between 1998 and 2006.
     It ordered the Federal Reserve to set “a reasonable and proportional” standard for interchange fees, which Visa and Mastercard charge consumers’ and merchants’ banks for their role in every debit transaction. The law ordered the Fed’s board of governors to consider the functional similarity between debit and checking transactions – which are already required to clear within the Federal Reserve bank system – and determine Visa and Mastercard’s actual costs in each debit transaction.
     Congress also ordered the Fed’s governors to establish rules that would prevent the networks from entering into exclusivity arrangements or keep future new networks from entering the marketplace. Initially, the Fed planned to limit the interchange fee to only costs associated with the authorization, clearing and settlement, or ACS, of debit transactions, excluding overhead costs and even an anti-fraud fee allowed under the Durbin plan.
     Merchants greeted the board’s initial proposal with enthusiasm. Networks and card issuers balked, however, lobbying to expand the list of allowable costs for any adopted interchange fee standard.
     The board ultimately adopted a plan that allowed issuers to charge as high as 21 cents per transaction plus .05 percent of the transaction’s value.
     In defending its decision, which became permanent last year, the Fed claimed that it had the discretion to consider additional costs for which the Durbin Amendment was silent. It also added a 1-cent anti-fraud charge and ordered that two unaffiliated networks be available for each debit card, though it ordered no such requirement for authorization methods.
     Industry associations and retailers – the plaintiffs in this action – sued the Fed before its decision even became final, seeking a declaration that the interchange fees and network nonexclusivity provisions are arbitrary, capricious, an abuse of discretion and therefore illegal. They accused the board of exceeding its statutory authority by adding allowable costs to the interchange fee, and blatantly disregarding the plain language of the Durbin Amendment by requiring that all debit cards have access to two unaffiliated networks rather than all debit transactions.
     U.S. District Judge for the District of Columbia Richard Leon granted the plaintiffs summary judgment Wednesday, finding that the Fed’s decision violated the Administrative Procedures Act.
     “I have no difficulty concluding that the statutory language evidences an intent by Congress to bifurcate the entire universe of costs associated with interchange fees,” Leon wrote (emphasis in original).
     “By using strategically placed ‘shall’ and ‘shall not’ terms – which plainly indicate the inclusion of the first category of costs and exclusion of the second – Congress expressed its clear intent to separate costs that must be included in the interchange transaction fee standard and ‘other costs’ that must be excluded,” Leon added.
     In a friend of the court brief on behalf of the plaintiff, Sen. Durbin also confirmed that only ACS costs could be passed on in the interchange fee, according to the ruling.
     “The plain text of the Durbin amendment thus precludes the board from considering in the interchange fee standard any costs, other than variable ACS costs incurred by the issuer in processing each debit transaction,” Leon wrote, rejecting the Fed’s argument that Congress failed to define “incremental cost” or delineate which costs are not specific to a debit transaction.
     “If I were to accept the board’s argument, then every term in the statute would have to be specifically defined or otherwise be deemed ambiguous,” Leon wrote. “This result makes no sense, and more importantly, it is not the law. When a term is not defined in a statute, a court must assume that ‘the legislative purpose is expressed by the ordinary meaning of the words used.'”
     In a small nod to the board, Leon credited it with not considering costs associated with executive compensation, research and development, and other areas.
     Some of the costs that the board did consider, however, are “contrary to the expressed will of Congress,” Leon wrote. This ultimately gives issuers the power to recover a fee “well above” the proposed caps of 7 cents and 12 cents, he added.
     Instead of justifying its interpretation legally, the Fed instead “simply noted that it is administratively difficult to discern a transaction’s incremental ACS costs,” ignoring a congressional mandate to consider such costs a ceiling rather than a minimum, Leon said.
     Though the board properly blocked Visa and Mastercard from restricting processing networks to just one or combined multiple affiliated networks, it failed to let merchants choose which network they want to use to process debit transactions, according to the ruling.
     “As Senator Durbin explained, the amendment was enacted at a time when network fees were on the rise due to exclusivity deals between dominant card networks and issuers,” Leon added. “Total network fees exceeded $4.1 billion in 2009, due in large part to the lack of competition resulting from exclusivity agreements. … Congress adopted the network non-exclusivity and routing provisions ‘to inhibit the continued consolidation of the dominant debit networks’ market power and to ensure competition and choice in the debit network market.'”
     It is not enough that consumers can choose which network processes the transaction by choosing “debit” for PIN authorization or “credit” for signature authentication, the court found.
     Given “‘the seriousness of the regulation’s deficiencies and the disruptive consequences of an interim change that may itself be changed,'” Leon set the Fed’s entire regulation aside.
     He stayed his vacatur, however, to provide the board with an opportunity to fix the deficiencies.
     The parties can brief the court as to how long the stay should last and whether the current regulation should remain in place until the Fed corrects it.
     “Keeping in mind I am inclined toward a stay of vacatur for months, if not years,” Leon added.
     Mastercard and Visa also face interchange fee caps in the European Union. Last week, the European Commission announced it would cap fees at just 0.2 percent of transaction value for debit cards and 0.3 percent for credit cards.
     Some months earlier, a federal judge dismissed a 2011 lawsuit by the National ATM Council and 13 other associations claiming Visa and Mastercard are “ringleaders and enforcers” of a scheme to force ATM operators to charge the same transaction fee to consumers, regardless of what card or network they use.
     In that case, U.S. District Judge Amy Berman Jackson held that “the complaints bristle with indignation, but when one strips away the conclusory assertions and the inferences proffered without factual support, there is very little left to consider.”

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