Hearing Set for Tomorrow on Court Interchange Ruling (Aug. 13, 2013)

Aug. 13, 2013

A hearing scheduled for tomorrow in U.S. District Court in Washington, D.C., will be the next step in the legal wrangling over the Federal Reserve’s debit interchange rule. The hearing follows the ruling late last month by U.S. District Court Judge Richard Leon that the Fed’s Board of Governors overreached in its interchange and network routing rulemaking and that the interchange cap set by the Fed was too high. That decision instructed the Fed to redesign the rule implementing the Durbin amendment to the Dodd-Frank Act, which caps debit card interchange fees and mandates network non-exclusivity regulations. Judge Leon issued a temporary stay on his own ruling, however, keeping the current rule in effect for an undefined period of time. The length of the stay is expected to be a focus of Wednesday’s hearing, which also will be presided over by Leon.

The Fed could use the hearing to make any plans to appeal the ruling public, ask for more time to decide whether to appeal or tell the judge it’s in the process of crafting a new rule and ask for the stay to be continued until the new rule is approved and announced, according to Credit Union National Association (CUNA). Or, Wednesday’s proceedings may simply be used as a scheduling session to set dates for future hearings. Although merchants have applauded the ruling, CUNA, a trade industry group for U.S. credit unions, said it has communicated to Fed staff the negative impact it believes the ruling would have on credit unions and other small card issuers.

Payment industry players argue that, if upheld, the ruling will have huge consequences for issuers, program managers and other payments stakeholders, by lowering the interchange cap without considering the fixed costs associated with processing transactions, such as fraud losses or transaction monitoring. The Fed’s final rule caps debit card interchange fees at 21 cents per transaction plus 0.05 percent of the transaction amount to pay for fraud losses and a separate fraud-prevention adjustment of 1 cent to pay for “effective” fraud prevention policies and procedures. The 21-cent cap was half of the 44-cent average issuers were receiving for debit transactions in mid-2011. The court’s language suggested that a cap of 7 to 12 cents was more in keeping with Congress’ intent. If upheld, the decision also would require merchants to be provided with a choice between multiple, unaffiliated networks for each transaction—not just a choice of two or more unaffiliated networks.

In a note sent today to investors, analysts at New York-based equity research firm Keefe, Bruyette & Woods (KBW) predicted that even if legal maneuverings require the Fed to revisit its debit rules, changes might not go into effect until 2015. “We think the process could take at least a year and a half to resolve, which should give the industry sufficient time to adjust economically,” the firm said. KBW believes there is a 65 percent to 70 percent likelihood the Fed will file an appeal to Judge Leon’s decision in order to protect its ability to interpret laws it is charged with enforcing. “In the instance where the Fed loses its appeal and the case is not reviewed by the Supreme Court, the timeline for the creation and implementation of a new [debit interchange] rule could be 12 to 18 months,” KBW said.