U.S. District Court Delivers a Blow to Financial Institutions

A U.S. district court ruling striking down the Federal Reserve’s price caps on debit interchange fees brings uncertainly to credit unions about the future of interchange income.

In the decision issued Wednesday by U.S. District Court Judge Richard Leon, the Federal Reserve was found to have improperly set the amount financial institutions can charge in debit fees.

“Yesterday’s ruling is a win for the retail and merchant industries in their effort to stifle interchange fees and brings uncertainty to the future of interchange income for all credit unions,” said Troy Stang, president and CEO of the Northwest Credit Union Association (NWCUA). “That said, it was one step in what will no doubt be a long battle on this issue.”

“We will work with the Credit Union National Association (CUNA) and the industry in developing next steps,” said Jennifer Wagner, vice president of legislative advocacy for the NWCUA.

Judge Leon concluded that the interchange transaction fee and network non-exclusivity regulations issued by the Fed allow financial institutions to recover interchange fees prohibited by law.

Quoting from Judge Leon’s opinion, “It appears that the Board completely misunderstood the Durbin Amendment’s statutory directive and interpreted the law in ways that were clearly foreclosed by Congress.”

“The decision, no doubt, will challenge credit unions to continue their debit card programs without incurring drastic cuts in revenue, or imposing additional fees on their members—the last thing that credit unions want to do,” said Eric Richard, CUNA’s general counsel.

The judgment leaves the current regulation in place at least through Aug. 14. On Aug. 14, 2013 the judge is expected to decide on the length of the stay and whether current standards should remain in place, or be replaced with interim standards that meet the statutory requirements. The judge indicated that his inclination is to leave a stay in place for months, not years.

The Federal Reserve can appeal the decision to the United States Court of Appeals for the District of Columbia Circuit (DC Circuit). However, three out of eleven seats are currently vacant and getting a case overturned on appeals is not an easy road.

Credit unions over $10 Billion will be directly impacted by this decision with numerous smaller credit unions potentially losing revenue due to market forces. BECU, the nation’s fourth largest credit union, would be impacted.

“At this point it is too early for us to determine what the impact would be to our members, however, any decrease from the current level would certainly have an impact on the value BECU returns to our members,” said Tom Berquist, SVP of member strategies for BECU.

The credit union movement argued that the 21 cent “swipe fee” cap the Fed set in the aftermath of the Dodd-Frank legislation was too low, and did not allow debit card issuers to cover their costs. It was simply a revenue grab for merchants, and consumers have not seen the price benefits merchants had promised when they advocated for a government–set cap on what financial institutions could charge for their services.

According to the Electronic Payments Coalition the current cap that has been in place for the past two years has transferred $6 Billion from financial institutions to merchants, with consumers seeing none of the promised benefits.

“Our Northwest congressional delegation committed to staying engaged with us to determine unintended consequences and potential hardships to small debit card issuers,” said the NWCUA’s Wagner. “It may be time to bring them back to the table.”

“A number of credit unions in the NW have lost interchange revenue due to the current regulation,” said John Trull, director of regulatory advocacy for the NWCUA. “A $1B credit union shared concrete data showing a loss of $646,377 dollars in interchange revenue over the course of a year. That was revenue taken from the credit union members and transferred to the merchants.”

The presiding judge, The Honorable Richard Leon, was appointed to the United States District Court for the District of Columbia by President George W. Bush and confirmed by the Senate in 2002.

Judge Leon gained some notoriety for his decision granting prisoners of the United States held in foreign territories the right to a trial (Habeas Corpus) the decision was overturned by the court of appeals but later upheld in a 5-4 Supreme Court decision.


Questions? Contact Lynn Heider: 503.350.2225, lheider@nwcua.org.

Posted in Advocacy News.