Federal Reserve Board Responds to Merchants’ Claims in Interchange Suit

The Federal Reserve Board filed its response Friday in a federal court in Washington, D.C., to merchants’ arguments for summary judgment in their lawsuit challenging the board’s debit card interchange fees rule mandated by the Dodd-Frank Act.

The lawsuit, filed in March, sought a summary judgment declaring the interchange rule and network non-exclusivity regulation invalid. The merchants’ suit alleges the Fed interchange cap—which became effective in October and caps interchange fees for debit transactions for issuers with assets of $10 billion or more at 21 cents—is too high and that the Fed exceeded its authority on the rule.

The Credit Union National Association (CUNA) and a coalition of associations representing thousands of small and large financial institutions held a conference Monday to review the brief. The coalition, including CUNA, filed its own amicus brief earlier in the case, providing financial institutions’ perspective on the rule, arguing that the rule’s interchange cap is too low and that it does not allow debit card issuers to cover their costs and earn a reasonable rate of return on their investments.

The Fed’s brief, filed in the U.S. District Court for the District of Columbia, made several arguments that it had interpreted the interchange statute reasonably.

First, said the brief, the Fed properly implemented Congress’ directive to consider incremental authorization, clearance or settlement (ACS) costs in setting standards for debit card interchange fees that are reasonable and proportional to the cost, and to not consider costs that are not specific to a particular electronic debit transaction. However, the Fed found a third category of costs on which “the statute is silent with respect to costs that are specific to a particular transaction other than incremental costs incurred by an issuer for authorizing, clearing and settling the transaction.”

The brief also noted: “Congress did not use parallel language to instruct the board on what to consider and what to exclude, and the board reasonably interpreted the language of the statute to allow for the consideration of costs that fall into neither category identified in the statute.”

The Fed prefaced its final rule with “an elaborate description of the process of [ACS].”  And it noted the “grave practical difficulties” in attempting to define concisely which costs were incremental, ACS costs, and which were not.

Second, “Congress’ authorization to the board to collect a broad spectrum of information supports the board’s view that it has authority under the statute to consider more than incremental ACS costs in setting the statutory standard,” said the Fed in its brief.

Third, the Fed board did not “misread” a recent U.S. Supreme Court opinion in Entergy Corp. v. Riverkeeper, which rejected the argument that statutory silence regarding a factor for consideration prohibited consideration of that factor.

Fourth, the Fed argued that the floor statement of the sponsor of the amendment requiring the interchange rule “cannot trump a statute’s text.”  It pointed out that Sen. Richard J. Durbin (D-Ill.), who sponsored the amendment, issued a floor statement on July 15, 2010 (and reiterated it in an amicus brief filed in the lawsuit) that “appears to divide the universe of costs into two categories—those incurred in ACS as part of a particular electronic debit transaction and those that are not.”

“Here, Sen. Durbin’s floor statement conflicts with the actual language enacted by Congress,” the Fed brief said, adding that the statute is silent as to costs that do not fall into either category and the statute “must govern over the floor statements of the bill’s sponsor.”

Also, “the statute is ambiguous with regard to categories of costs it does not expressly address. The settled Chevron presumption as articulated by the Supreme Court and the D.C. Circuit is that the board may fill those gaps, as long as it acts reasonably in doing so.”

The Fed “reasonably construed” the statute “by excluding consideration not only of costs that are not incurred in the course of a particular transaction, but by broadening the prohibition to exclude consideration of costs not incurred in the course of effecting any electronic debit transaction,” said the brief.

“Moreover, had Congress intended the phrase ‘which are not specific to a particular electronic debit transaction’ to be merely descriptive of ‘other costs,’ it would have set that phrase off with a comma or parentheses, which it did not do … Because the board’s interpretation gives life and meaning to that phrase … it is the preferred construction.

“The board also argued it did not believe it was reasonable to promulgate standards for assessing whether interchange transaction fees are ‘reasonable’ or ‘proportional’ to costs by reading [the statute] to eliminate from consideration almost all costs incurred by the issuer.”

Instead the board interpreted the phrase to mean “those costs that are not incurred in the course of effecting any electronic debit transaction,” and gave as examples corporate overhead and account relationship costs; debit card program costs such as card production and delivery; marketing; costs of research and development; and costs of non-sufficient funds handling.”

The board “distinguished among costs that are related in some way to electronic debit transactions, but are not specific to any particular electronic debit transaction, and excluded those costs from consideration, as the statute requires.”

It also noted it properly considered four specific costs contested by the merchant plaintiffs in setting the statutory standard:

  • Fixed costs of ACS;
  • Transaction monitoring costs (preauthorization costs associated with confirming that a debit card is valid and the cardholder authentic, which the Fed said was “an integral part of the authorization of a particular electronic debit transaction”;
  • Fraud losses, which “are specific to a particular transaction [and] generally the result of the ACS of an apparently valid transaction that the cardholder later identifies as fraudulent,” the Fed said, distinguishing between fraud losses and fraud prevention. The board noted that allowing issuers to recover a portion of fraud losses through interchange fees will not eliminate their incentive to monitor and prevent fraud, as the plaintiffs claimed, because “issuers will continue to bear the cost of some fraud losses and consumers will continue to demand protection.”
  • Network processing fees—fees paid by an issuer to a network. The board noted that “these fees, which are both specific to a particular transaction and vary with the number of transactions processed by the network for that issuer…were properly included in the setting of the standard.”

The Fed’s brief also noted that contrary to amicus briefs filed in the case, “the final rule does not require networks to raise interchange fees on small transactions, which was an independent business decision by the networks.”


Questions? Contact the Compliance Hotline: 1.800.546.4465, compliance@nwcua.org.

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