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Saturday, June 15, 2024 | Back issues
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Reduction of Debit Card Fees Upheld by Court

(CN) - In lowering the fees merchants pay Mastercard and Visa for services by their debit card network fees, the Federal Reserve followed congressional intent, the D.C. Circuit ruled.

As part of the Dodd-Frank Wall Street Reform and Protection Act of 2010, U.S. Sen. Dick Durbin authored an amendment to provide relief from escalating merchant fees associated with debit card use, which had risen an astounding 234 percent between 1998 and 2006.

The Illinois Democrat's plan 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. In addition to having the Fed's board of governors consider the functional similarity between debit and checking transactions, the law also demanded a determination of the actual costs Visa and Mastercard incur 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 ACS - short for authorization, clearing and settlement - of debit transactions, excluding overhead costs and even an anti-fraud fee allowed under the Durbin plan.

Networks and card issuers balked over that plan, and lobbied the Fed 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 0.05 percent of the transaction's value, claiming it had the authority to consider additional costs not addressed by the Durbin Amendment.

Industry associations and retailers sued the Fed, 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 Richard Leon in Washington granted the merchants summary judgment last year, finding that the Fed's decision violated the Administrative Procedures Act. He noted that congressional use of "shall" and "shall not" terms indicated a clear intent to limit costs associated with interchange fees - a fact confirmed by Sen. Durbin in an amicus filing.

In a reversal last week, however, the D.C Circuit found that the board's new rules "generally rest on reasonable constructions of the statute." The judges also took exception with the Durbin Amendment's ambiguity.

"Congress put the board, the District Court, and us in a real bind," Judge David Tatel wrote for the three-judge panel. "Perhaps unsurprising given that the Durbin Amendment was crafted in conference committee at the eleventh hour, its language is confusing and its structure convoluted. But because neither agencies nor courts have authority to disregard the demands of even poorly drafted legislation, we must do our best to discern Congress's intent and to determine whether the board's regulations are faithful to it."

Tatel noted that the ambiguity of the Durbin Amendment allowed the board to choose either a narrow interpretation of costs as the merchants lobbied for, or the expanded version that the banks ultimately won.

"Had Congress wanted to allow issuers to recover only incremental ACS costs, it could have done so directly," the 38-page ruling states. "For instance, Congress could have instructed the board to 'promulgate regulations ensuring that interchange fees are reasonable and proportional to the incremental costs of authorization, clearance, and settlement that an issuer incurs with respect to a particular electronic debit transaction.' Instead, Congress required the board to promulgate regulations ensuring that interchange fees are 'reasonable and proportional to the cost incurred by the issuer with respect to the transaction' and separately instructed the board, when determining issuer costs, to 'distinguish between' incremental ACS costs, which the board must consider, and 'other costs which are not specific to a particular electronic debit transaction,' which the board must not consider."

The appeals court did seek clarification on remand, however, of why banks should be allowed to recoup transaction-monitoring costs separately from their fraud-prevention costs. That rule need not be vacated now since doing so "would lead to an entirely unregulated market allowing the average interchange fee to once again reach or exceed 44 cents per transaction," Tatel added.

Additionally, the panel found that the Fed satisfied Congress's order to end exclusivity deals between card networks and issuers for debit cards. The merchants had argued that the rule did not go far enough - namely, the opportunity to choose a network for each debit transaction initiated by a customer.

"The merchants' preferred rule would result in more competition," Tatel wrote. "But in its final rule the bard explained the policy considerations that led it to reject that approach. For one thing, cardholders might prefer to route transactions over certain networks, perhaps because they believe those networks to have better fraud prevention policies. Also, the merchants' preferred rule 'could potentially limit the development and introduction of new authentication methods' since issuers would be unable to compel merchants to accept new authentication techniques. The merchants ignore these reasonable concerns. Given that the board's rule advances the Durbin Amendment's purpose, we decline to second-guess its reasoned decision to reject an alternative option that might have further advanced that purpose."

Earlier this year, Visa voluntarily agreed to cut interchange fees in the EU in an effort to end its antitrust woes with the European Commission. Mastercard faces a similar investigation over the fees it charges to foreign tourists shopping in the EU.

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