On Monday April 4, 2011, the latest development in the fight over debit card interchange fee regulation came from a court room in Sioux Falls, South Dakota, when U.S. District Judge Lawrence L. Piersol denied a federal government request to dismiss a suit filed by Minnesota-based TCF National Bank against Federal Reserve Chairman Ben S. Bernanke and the Federal Reserve Board of Governors.
The suit challenges the constitutionality of the so-called Durbin Amendment to the Dodd-Frank Wall Street Reform and Consumer Protection Act, which gives the power to regulate debit card swipe fees to the Fed. The Durbin Amendment is unconstitutional, TCF alleges, both because it unfairly impacts contracts the company has with Visa and MasterCard and because it exempts small banks, thereby putting larger financial institutions at a disadvantage and possibly breaking equal protection laws. The suit also seeks an injunction against the 12 cent interchange fee cap, which was proposed by the Fed in December and is set to take effect on July 21.
Despite denying the government’s motion for dismissal, Piersol declined to rule on the validity of TCF’s suit, preferring instead to wait until Congressional debates on the matter conclude.
Such a wait-and-see attitude has become popular among players on both side of the issue. Members of both the House and the Senate have sponsored bills aimed at delaying the implementation of any caps until more research can be done on their ultimate impact, and the Federal Reserve Board is currently in the process of reviewing over 11,000 public comments on the matter—a task which will cause the Fed to miss an April 21 deadline to write final regulations regarding its interchange fee proposal.
A day after the Piersol ruling was handed down, Rep. Barney Frank, who first proposed the law which bears his name in the House, announced his intention to revise the portion of the law that deals with interchange fees.
“The Federal Reserve’s announcement that they cannot meet the deadline on interchange fees confirms my view that this is the only part of the financial reform bill that needs to be amended,” Frank said in a statement. “For this reason, I support legislative action to postpone the deadline so that we can revisit it.”
Frank’s announcement has been viewed by many as the kiss of death for the Fed’s proposed 12-cent cap, making it only a matter of time before it is officially delayed.
“There’s no question it’s a bad sign when one of the guys whose name is on the law says it needs changes,” said Odysseas Papadimitriou, CEO of the credit comparison website Card Hub and an industry veteran. “The law does need changes, but not because it will cost banks revenue. Rather, a truly competitive payment landscape must be created, and caps on debit card swipe fees aren’t going to get the job done.
The Durbin Amendment, in its current form, would not significantly lower the financial burden on merchants, as its proponents would hope. Instead, it will only lead to a restructuring of the payment landscape. Unless more comprehensive changes are made, debit card offers will just get worse, credit cards will gain market share, and banks will increase fees.”
According to a Card Hub Interchange Fee Study, the Fed’s proposed caps could cost large banks as much as $18.8 billion annually. Financial institutions, like JPMorgan Chase, have therefore been vocal in their opposition to the limits since they were announced.