Debit Interchange Rules Will Be Addressed, Judge Won’t Wait

by Mercator Advisory Group 0

The judge presiding over the retailer debit interchange lawsuit and took the Federal Reserve to task in his original ruling, stayed true to form in Wednesday’s hearing.

Judge Leon made it clear to the Fed it has seven days to respond to his request for how it will handle rewriting the Durbin Amendment regardless of any appeal the organization might file. Leon’s decision comes after a Fed lawyer said it had not been able to arrive at a decision on how best to proceed.

In another surprise move, the judge also asked the parties to consider if and how merchants should be reimbursed for excessive fees paid under the original rules. All told, it must have been an uncomfortable hearing for the Federal Reserve and potentially very bad news for debit issuers and their card networks.

It would appear there will be material changes made to Regulation II in the very near term. In addition, according to some legal opinions emerging in the press, the Fed may lack the authority to appeal. Instead, it may have to turn to the Department of Justice for approval before proceeding with an appeal. Even this is unclear at this point and with just a week to go before the Fed must respond to Leon, he is showing his long experience working in Washington to effectively bypass any delays in dealing with his ruling.

From Reuters:

Leon criticized the Fed for not deciding quickly whether it could do an interim rule and said the Fed’s Board of Governors would not have “the luxury” of taking its time. He asked them to take a position on writing an interim rule by next Wednesday.

The next hearing is scheduled for Aug. 21st.

We would anticipate the Fed may have little choice but to roll back debit interchange fees unless there is some other legal delay available to it. The question now is what those new fees will be

In the draft rules published December 2010, the Fed proposed two alternatives for setting debit interchange. In the first alternative, issuers determine their internal costs and set the fee themselves, up to a safe harbor of $0.07 per transaction or just accepted $0.07 per transaction. In addition, issuers argue they should earn an additional $0.05 based on their costs, to bring the safe harbor up to $0.12.

The second alternative was to set an interchange fee cap of $0.12, which was ultimately incorporated into the final rule, minus the $0.12 cap. Thus, it’s possible that the Fed will chose to roll back the existing cap to $0.12, which aligns the interim rule with the current rule and introduces no further operational delays to implementation. One wonders if the judge will look askance at the $0.12, however, and ask the Fed to justify why it would not roll the fee back to the $0.07 safe harbor.

The question of what to do about dual network routing per authorization type is much more difficult since operationally, there would be a great deal of work to be done to implement it. What might an interim rule look like? The only reasonable answer is that the Fed defines its own timeline for answering this question as the interim rule, but it appears the judge will have no patience for a long discussion period.

Click here to read more from Reuters.