Mercator Blog

Fed Swats Down Judge Leon Ruling on Durbin Amendment
Date: March 21, 2014
Research Team
The ongoing saga of the Durbin Amendment took another turn today. The U.S. Court of Appeals for the District of Columbia Circuit reversed the major elements of Judge Richard Leon’s ruling. Judge Leon’s ruling was reversed in two ways: the interchange cap and network routing options. In mid-2013, Judge Leon delivered a stinging opinion to the Federal Reserve Bank, finding that the Federal Reserve Bank did not follow the law as originally written. He removed the 21 cent + 5 bp interchange cap per transaction applied by the Federal Reserve that effectively lowered the interchange cap to 12 cents per transaction and required that two signature and two PIN networks must be enabled on all debit card transactions processed by merchants. In essence, the Federal Reserve Bank’s interpretations were accepted and reinforced. Judge David Tatel of the U.S Court of Appeals in D.C. wrote in the ruling that “We disagree. Applying traditional tools of statutory interpretation, we hold that the Board’s rules generally rest on reasonable constructions of the statute.”

The two components of Judge Leon’s ruling that have been overturned impacts debit card issuers differently. The interchange fee being kept at the higher Federal Reserve Bank rate (rather than the lower rate it might have gone to if the Judge Leon ruling stood), will now allow a sigh of relief from the debit issuing community. The lower potential rate had caused the industry to come to a relative standstill regarding implementation of EMV on debit cards. The profitability of debit cards had been hanging in the balance for some regulated issuers – and would have caused debit card profitability for some to turn negative if the interchange rate had been substantially lowered. In discussions with many issuers, Mercator Advisory Group heard this concern repeatedly. The other concern, that Judge Leon’s requirement that merchants would need to be given the ability to choose two PIN and two signature debit networks to route their transactions, created problems for implementation of EMV. Payment networks have noted that debit issuers were awaiting the appeals court ruling to decide whether to move ahead with the higher cost EMV or delay the EMV decision based on a longer term evaluation. Based on in depth discussions with issuers, payment networks and processors, we strongly believe they will now begin an accelerated EMV implementation process.

One note of concern. We have not heard an initial response from the National Association of Convenience Stores (NACS), the appellees in the case. However, National Retail Federation (NRF) Senior Vice President and General Counsel Mallory Duncan is quoted in the Associated Press as saying, “NRF is disappointed and remains confident that the Federal Reserve erred when it set the swipe fee cap far higher than intended by Congress. The Fed ignored congressional intent and worked to shield debit card companies and big banks. A self-described victory for the banks usually results in higher costs for consumers.”

Surely this decision will not sit well with the rest of the merchant community. We anticipate a response and there is every reason to believe it could be in the direction of an appeal to the Supreme Court of the U.S. In response to today’s actions Duncan further stated, “We are reviewing the decision and will determine whether to appeal.”

If that occurs, expect a new round of delays.