A federal court yesterday invalidated Regulation II’s standard for setting debit interchange fees, finding that it permitted interchange fees at levels higher than federal statute allows and violated congressional intent. However, the court temporarily stayed its action pending an anticipated appeal by the Federal Reserve.
A group of North Dakota retailer trade associations and truck stop Corner Post sued the Fed in 2021 on the grounds that, in Reg II, the Fed exceeded its statutory authority to set interchange fees that are “reasonable and proportional to the cost incurred by the issuer with respect to the transaction.”
In his ruling, U.S. District Court Judge Daniel Traynor sided with the plaintiffs, finding that the Dodd-Frank Act’s Durbin Amendment “clearly prohibits” the consideration of any costs except for incremental authorization, clearance or settlement (ACS) costs in setting fees.
Still, while ruling against the Fed, Traynor criticized the Durbin Amendment as confusing and not particularly well written.
“When one wonders if studying grammar and English’s oddities is worthwhile, this case answers with a resounding ‘yes,’” he wrote. “It exemplifies how precise grammar and syntax might have avoided over a decade of legal battles.”
Traynor vacated Reg II but temporarily stayed the decision to give the Fed time to appeal his decision and “to prevent interchange transaction fees from becoming a completely unregulated market.”
ABA disappointed but not surprised
In a statement, American Bankers Association President and CEO Rob Nichols expressed ABA’s disappointment with the decision while adding that it did not come as a complete surprise.
“From its inception, the Durbin Amendment imposing government price controls on debit cards has been flawed policy that undercuts consumers by making basic banking services like free checking and other consumer benefits such as rewards impossible for banks to offer,” Nichols said. “Even the judge noted the flaws in the original Durbin language.”
Nichols added that the ruling only harms consumers by prohibiting government-mandated interchange fees from supporting fraud prevention and enhanced data security. “It allows retailers and merchants to effectively benefit from the superhighway that is America’s debit payment system without having to cover any of the costs needed to maintain, protect and upgrade that system,” he said.
“We look forward to the Federal Reserve vigorously appealing this outcome as it indicated it would during oral arguments, so our members can continue to offer consumers the safe, secure and convenient 24/7 payment system they have come to expect in this country,” he said. “In the meantime, retailers and merchants should stop doing everything they can to undermine that system just to pad their profits.”
