Yesterday, United States District Court Judge Richard Leon threw out the Fed's attempt to implement the so-called Durbin Amendment. The harshly worded opinion faulted the Fed's "utterly indefensible" approach for running "completely afoul of the text, design and purpose of the Durbin Amendment." Although aimed at "the seriously deficient nature of the regulations at issue," the court's ruling confirms the unworkability of the Durbin Amendment as drafted by Congress.
The Durbin Amendment, which is part of the Dodd-Frank Act, was the product of a long-running dispute between merchants and debit card issuers and processing networks. Every time a customer uses his debit card, the merchant pays a transaction fee. This fee is split among the merchant's bank, the network over which the transaction is routed, and the bank that issued the debit card. The card issuer's portion of that fee is called an "interchange fee." Merchants have long complained about the level of interchange fees and merchants' inability to choose the network over which transactions are routed.
The Durbin Amendment responded to merchants' concerns. It directed the Fed, in accordance with statutory guidelines, to establish a standard for the interchange transaction fees paid to issuers other than small banks and to ensure that merchants have more than one network choice for processing debit card transactions. After proposing a lower cap, the Fed responded to comments by adopting a rule that capped the interchange fee at 21 cents plus .5% of the transaction's value. The Fed also opted for the less stringent of two proposed approaches to achieving the prohibition on network exclusivity.
The court, drawing heavily on grammar rules and Senator Durbin's statements, agreed with the plaintiffs--a group of retailers, convenience stores, restaurants, and other merchants--that the statutory language is clearly contrary to the Fed's interpretation on both points. With respect to the interchange fee standard, the court pointed to the statute's two categories of costs: incremental costs related to a particular debit transaction--which the Fed was authorized to consider in setting the standard--and other costs incurred by debit card issuers--which the Fed was not authorized to consider. The court rejected the Fed's conclusion that a third category of costs did not fit neatly within either of the two statutory categories and therefore could be taken into account. As the court explained, "Incremental [authorization, clearing and settlement] costs of individual transactions incurred by issuers may be considered. That's it!" With respect to the network exclusivity prohibition, the court held that the Fed's improper reading of the statute had caused it to adopt an approach that would only prohibit network exclusivity with respect to a subset of transactions.
The court's reading of the Durbin Amendment may well be in accord with the vision of the authors of that provision. That vision, however, may not accord with the realities of a market in which costs cannot simply be wished away. The Fed, when it adopted its rule, explained that "operational constraints make the determination of which in-house costs an issuer incurs in executing any particular transaction virtually impossible in practice." Accordingly, the Fed explained, it chose "an interpretation [that] gives life and meaning to" the statutory prohibition on considering certain costs, "without creating tremendous burdens and practical absurdities discussed by commenters." The court said in no uncertain terms that the Fed's approach ran directly counter to the statute. The court read the statute to demand much less flexible and more stringent controls on debit card transaction processing. When the Fed devises a rule that satisfies the court's reading of the statute, we may find that the new approach distorts the market in ways that bring unpleasant, unintended consequences to the retail and bank customers that it was supposed to benefit.