A lawsuit brought by a group of retail associations and retailers against the Board of Governors of the Federal Reserve System asks the courts to find the board's rules to implement the debit card swipe fee requirements of the Durbin amendment to be "arbitrary, capricious and an abuse of discretion."
The suit would be interesting simply for being brought by the retailers that the amendment was intended to benefit. What is even more interesting is that, from my perspective, both the retailers and the board misread the Durbin amendment.
The Dodd-Frank Act provision referred to as the Durbin amendment established standards to limit the amount of fees, known as interchange fees, that debit card issuing banks collect each time a consumer swipes his card to make a retail purchase or to access. The interchange fees cover the cost of moving funds from the cardholder's bank account to the retailer's bank and related processing costs, as well as fraud prevention.
To implement the Durbin amendment, the Federal Reserve set a cap on interchange fees of 21 cents per transaction plus 5 basis points of the value of the transaction. The retailers allege that the board had it right in its initial proposal that set a 12 cent per transaction cap. In my view under a proper reading of the language of the statute, both the retailers and the Federal Reserve Board have it wrong.
The Durbin amendment is a last minute addition to the overhaul of the U.S. banking and financial system in response to the global financial crisis. No one, not even the provision's sponsor, Senator Richard Durbin, advocated that debit card swipe fees were somehow implicated as a cause of the financial crisis. The Durbin amendment nonetheless gained traction in what was seen as the need to protect retailers — and by extension consumers — from fees set by payment networks, such as Visa and MasterCard that process the debit transactions.
The networks arguably are more naturally aligned with issuers — as both derive their revenues from transaction volume. Given retailers' limited negotiating leverage, the legislation sought to limit the range of fees set by the payment networks by putting the onus on banks to charge a fee on each debit card swipe that is "reasonable and proportional to the cost incurred by the [bank] with respect to the transaction." If the Durbin Amendment was intended to deal with the payment networks' monopolistic-like control of the market, it resulted in the opposite. Any potential entrant would be hard put to recoup its start-up costs with the fee structure put in place by the board.
The statute left the Federal Reserve to "establish the standards for assessing whether any interchange fee . . . is reasonable and proportional" to an issuer's cost. The statute is clear and straightforward. The board is required to establish standards. Not fix a cap, whether at levels satisfactory to retailers or not.
If you don't believe this author, ask the statute's author. Senator Durbin made clear in his statement supporting inclusion of the provision in the financial reform legislation that the "Durbin amendment would not have the Federal Reserve set interchange prices."
So what do 21 cents and 5 basis points — or 12 cents — have to do with standards that are reasonable and proportional to an issuer’s transaction costs? Not much, based on what the Federal Reserve had to say in proposing the latter and implementing the former. It would appear that the 12 cents the board initially proposed is nothing more than the simple median per transaction processing cost for all kinds of debit card transactions — signature, PIN and prepaid — as reported by 89 debit card-issuing banks in response to a 2010 board survey. That 12 cent median cost corresponds to the median of the average costs for the three types of debit card transactions that range from 8 cents to almost 64 cents. The board's final rule revises the 12 cent cap to 21 cents, which the Federal Reserve says is the average per-transaction cost of the issuer at the 80th percentile in the survey based on a different universe of costs then those included in the original 12 cents proposed.