Strike Back: Appeals Court Overturns US Interchange Fee Ruling

US banks scored a big win last week as the DC Circuit Court of Appeals reversed a federal judge’s ruling last summer, which had struck down the Federal Reserve’s cap on debit interchange fees.

The central bank set the cap at 21 cents per transaction in 2011, plus an additional 0.05% of the purchase price to cover fraud protection, resulting in an average of 24 cents per transaction. US District Court Judge Richard Leon determined that the central bank included expenses into the cap that were outside the scope of the 2010 Wall Street Reform and Consumer Protection Act and struck it down. He also said the Fed wrongly interpreted a provision of the law that allows retailers to choose which network they use to route debit card payments.

But the appeals court’s said the Fed reasonably interpreted the law, doing its best to overcome the ‘ambiguity’ of the Durbin Amendment. Judge David Tatel wrote in the court opinion that Congress put the Fed, the district court and the appeals court “in a real bind.” He added that the Durbin Amendment “was crafted in conference committee at the eleventh hour, its language is confusing and its structure convoluted.”

The ruling gives banks free rein to charge retailers 21 cents per transaction plus fraud charges – about half of the pre-Durbin 44-cent interchange fee average but nearly double the 12-cent cap that the Fed had initially proposed.


US retail trade associations unsurprisingly expressed disappointment over the ruling. Mallory Duncan, senior vice president (SVP) and general counsel of the National Retail Federation (NRF), said in a statement that the Fed ‘erred’ when it set the cap far higher than Congress initially intended. “The Fed ignored congressional intent and worked to shield debit card companies and big banks,” he said. “A self-described victory for the banks usually results in higher costs for consumers.”

The NRF accused the Fed of raising its initial 12-cent cap after heavy lobbying from the financial services industry. Duncan said that the NRF is determining whether it would appeal.

Henry Armour, president and chief executive (CEO) of the National Association of Convenience Stores (NACS) accused the appeals court of misreading the law and the Fed’s rule on debit interchange fees. “Any rule that would allow profit margins of more than 1,000% and raise fees on many transactions clearly violates the letter and intent of the law Congress passed,” he said.

Senator Dick Durbin also lambasted the ruling, calling it a “giveaway to the nation’s most powerful banks and a blow to consumers and small businesses across America.” He added that the ruling would allow Visa and MasterCard to dramatically increase fees on many small businesses, “contrary to Congress’s clear language and intent.”

Meanwhile, banks lauded the decision. Frank Keating, president and CEO of the American Bankers Association (ABA) said Judge Leon’s ruling would have “harmed banks of all sizes” and made it more difficult for those banks to serve their customers. He also took a shot at the Durbin Amendment, claiming that it has “not accomplished its goal of lowering prices for consumers” and has instead “only served to increase the bottom line for big box retailers.”

Financial research and advisory firm Aite Group considers the ruling to be “significant and precedent-setting,” in that it upheld the Fed’s interpretation authority and its ability to enforce banking laws. “The FRB will not be required to succumb to a district court ruling undermining its authority,” Aite said, in a statement. “This decision also keeps debit card interchange rates at their current levels, which is good news for consumers. Prior actions reducing interchange rates have caused banks to increase fees and minimum balances on consumer checking accounts, forcing some consumers to make difficult banking choices and forcing other consumers out of the market altogether.”

Aite added that the ruling is a major win for Visa, MasterCard, and their issuers, which will not be required to maintain two signature networks on the same card, “something that would have caused major cost and angst among the financial services community on how to process those transactions.”

Next Steps

Retailers are expected to keep fighting, and may attempt to argue their case in front of the Supreme Court. But Professor Adam Levitin, who specialises in financial regulation and consumer protection at Georgetown Law, told the
New York Times
that the court is unlikely to hear their case. However, he noted that the Fed is required to reissue rules under Durbin on a biannual basis, “so the issue isn’t really over.”


Related reading