Durbin Amendment: The Dodd-Frank Act, included a Senate amendment originally offered by Senate Majority Whip Dick Durbin (D-IL) that provides authority to the Federal Reserve to ensure that debit card interchange fees are “reasonable and proportional” to actual processing costs. On June 29, 2011, the Federal Reserve approved final rules implementing the Durbin Amendment, modifying the proposed rules issued in December 2010. The new rules, which are set to take effect on October 1, 2011, include the following provisions:
Following the enactment of the Durbin Amendment and leading up to the issuance of final rules, RILA shifted its strategy to the implementation phase of the law and the Federal Reserve rules described above. RILA worked with members of the Merchants Payments Coalition (MPC) to create a Task Force, chaired by RILA and comprised of the MPC Executive Committee, focusing solely on these rulemakings in order derive the maximum results of interchange reform for the retail industry. The Task Force hired counsel, a team of economists, and other industry experts to produce economic white papers and expert testimony that were presented to Federal Reserve staff on November 2, 2010. The white papers also served as the basis for comments that the Task Force provided on the proposed rules implementing the new law.
Tester-Corker/Capito-Wasserman Schultz Delay Efforts: In Congress, legislation was introduced earlier in 2011 in both the United States Senate and the U.S. House of Representatives to delay implementation of the Durbin Amendment by one or two years, respectively. In the Senate, Senators Jon Tester (D-MT) and Bob Corker (R-TN) introduced the Debit Interchange Fee Study Act of 2011 (S. 575) in March, later modifying their proposal and offering it as an unsuccessful amendment to unrelated legislation reauthorizing the Economic Development Administration (S. 782). In addition to Sens. Tester and Corker, the amendment (S.Amdt. 392) was cosponsored by Sens. Kay Hagan (D-NC), Mike Crapo (R-ID), Michael Bennet (D-CO), Roy Blunt (R-MO), Tom Carper (D-DE), Jon Kyl (R-AZ) and Chris Coons (D-DE). If enacted, it would have delayed the effective dates in the Durbin Amendment by one year, directed the Federal Reserve to withdraw the proposed rulemakings, and required a joint study by the Federal Reserve, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, and the National Credit Union Administration. On June 8, 2011, having not reached the required 60 votes needed for passage, the Senate voted down the Tester-Corker amendment by a vote of 54-45, effectively killing any further legislative attempts by this Congress to modify or repeal the Durbin Amendment.
In the House, Representatives Shelley Moore Capito (R-WV) and Debbie Wasserman Schultz (D-FL) introduced the Consumers Payment System Protection Act (H.R. 1081). The bill would delay implementation of the effective dates in the Durbin Amendment by one year and direct the Federal Reserve to make revisions to any proposed or final rule if two of the federal agencies (i.e., the Federal Reserve, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, and the National Credit Union Administration), required to conduct a joint study under the bill, opposed the rule. Following the failure of the Tester-Corker effort in the Senate, the House Financial Services Committee has not indicated any plans to take up the Capito bill.
Similar to efforts that RILA led with respect to the passage of the Durbin Amendment, RILA executed an aggressive media, grassroots, and advocacy strategy with a small-business focus to ensure that neither the Senator nor House bill were successful in delaying the Durbin Amendment.
DOJ Lawsuit Against American Express, MasterCard and Visa: On October 4, 2010, the U.S. Department of Justice (DOJ) and the Attorneys General (AGs) from Connecticut, Iowa, Maryland, Michigan, Missouri, Ohio and Texas filed a lawsuit against Visa, MasterCard and American Express claiming anticompetitive practices relating to prohibitions placed on merchants’ ability to steer customers towards cheaper forms of payments. Simultaneous with the filing of the lawsuit in the United States District Court for the Eastern District of New York, the DOJ announced that it had entered into a settlement with Visa and MasterCard with respect to the case. American Express subsequently announced that it would challenge the lawsuit. While DOJ officials have indicated their belief that the case will bring more competition on interchange fees, the lawsuit and subsequent settlement do not challenge the more egregious practices by the credit card networks, including the honor-all-cards rule and the prohibition against merchant surcharging.
The central provision of the proposed settlement prohibits Visa and MasterCard rules that prevent merchant from: “(1) offering the customer a price discount, rebate, free or discounted product or service, or other benefit if the customer uses a particular brand or type of General Purpose Card or particular form of payment; (2) expressing a preference for the use of a particular brand or type of General Purpose Card or particular form of payment; (3) promoting a particular brand or type of General Purpose Card or particular form of payment through posted information; through the size, prominence, or sequencing of payment choices; or through other communications to the customer; or (4) communicating to customers the reasonably estimated or actual costs incurred by the merchant when a customer pays with a particular brand or type of General Purpose Card.” Visa and MasterCard are also required to notify DOJ and the state AGs if they adopt any new rule that “limits or restrains how Merchants accept, process, promote, or encourage use of Forms of Payment other than General Purpose Cards or of General Purpose Cards bearing the Brand of another General Purpose Card Network.”
In December 2010 RILA filed public comments with the DOJ under the Tunney Act, stressing that the settlement would be largely ineffective unless merchants were provided with visual and/or electronic identifiers in order to instantaneously determine the interchange rate associated with each card to determine if some sort of a discount or other benefit should be applied at the point of sale. On June 14, 2011, the DOJ filed its responses to the public Tunney Act comments, and, as expected, the DOJ did not modify the proposed settlement agreement. In its response to RILA’s comment letter, DOJ noted that Visa and MasterCard will make available an electronic system for identifying a credit card’s interchange rate and that the two networks will “face consequences” under the agreement if they impose or increase fees for the system that “prevent or restrain merchants from engaging in” permitted steering activities. The DOJ, however, dismissed the need for a visual identifier on the card to help merchants and consumers determine the type of card.
RILA anticipates that the court will approve the settlement without modification later this summer. RILA will continue to urge the DOJ to take other actions to bring competition and transparency to interchange fees.
TCF Constitutional Challenge of Durbin Amendment: On October 12, 2010, TCF National Bank of Minnesota filed suit challenging the constitutionality of the interchange provisions included in the Dodd-Frank Act (National Bank vs. the Board of Governors of the Federal Reserve System). The lawsuit seeks a preliminary injunction against the enforcement of the Durbin Amendment and is based on three primary grounds: (1) the amendment is facially unconstitutional under the Due Process Clause of the Fifth Amendment of the U.S. Constitution because the forthcoming regulations will prevent TCF from “recovering its costs and earning a fair rate of return on its invested capital”; (2) the amendment constitutes a taking of property without just compensation in violation of the Takings Clause of the Fifth Amendment; and (3) the Durbin Amendment violates TCF’s right to equal protection of law as applied to the United States through the Due Process Clause.
Following an April 4, 2011, hearing, the U.S. District Court of South Dakota denied TCF’s motion for a preliminary injunction, finding that TCF “has not shown a likelihood of success on the merits.” Subsequently, TCF filed an appeal, and on June 29, 2011, the U.S. Court of Appeals for the Eighth Circuit in St. Louis refused TCF National Bank’s request to enjoin the Federal Reserve Board from enforcing the Durbin Amendment’s debit card interchange fee standards. In a short opinion, the appeals court ruled that the district court had correctly found that TCF was not likely to prevail on the merits of its claims that the Durbin Amendment would violate its Due Process and Equal Protection rights under the Constitution. Consequently, there could be no grounds to issue a preliminary injunction. One day after circuit court ruling, TCF announced that it was withdrawing its case entirely, saying that it was “time to move on.” The Retail Litigation Center, which is supported by RILA and many of its members, filed two separate amicus briefs on behalf of the retail industry opposing TCF’s constitutional challenge to the Durbin Amendment and subsequent appeal.
Merchant Litigation Challenging Federal Reserve’s Rulemaking: On November 22, a group of merchants and their trade associations sued the Federal Reserve in the federal District Court for the District of Columbia challenging the Federal Reserve’s rulemakings implementing the so-called Durbin Amendment relating to debit card interchange fees. The suit, which was brought by the National Association of Convenience Stores, National Retail Federation, Food Marketing Institute, Miller Oil Co., Inc., and Boscov’s Department Stores, LLC, claims that the Federal Reserve ignored the intent and statutory direction of the Durbin Amendment in promulgating its final rule. Plaintiffs have asked the court to “enter a declaratory judgment, declaring that the portions of the Final Rule setting standards for reasonable and proportional interchange fees (12 C.F.R. 235.3(b)) and networks necessary for routing debit transactions (12 C.F.R. 235.7(a)(2)) are arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law.”
RILA has made available a press statement reacting to the litigation, saying that “The Retail Industry Leaders Association (RILA) believes that the Federal Reserve debit interchange rule was inconsistent with the swipe fee reform law passed by Congress and signed into law. The Federal Reserve’s misguided rule will harm many of those that Congress set out to help. RILA supports the goals of the lawsuit and will continue to pursue stronger reforms to the broken debit and credit payments market.”
Although RILA was not party to the suit, many of our members were adversely affected by the Federal Reserve’s final rule. RILA is committed to ensuring that the Durbin Amendment reforms – for which RILA and our member companies fought so hard – are not eroded or repealed by Congress.
RILA will continue its leadership role in efforts to reform interchange fees and to implement the Durbin Amendment as well as inform and engage RILA member companies of the latest developments through its Interchange Working Group. With the enactment of the Durbin Amendment and issuance of the Federal Reserve’s final rules, RILA will monitor the effective implementation of the new rules. In addition, RILA will continue to advocate for additional interchange reform and work with the White House, Department of Justice (DOJ), Federal Trade Commission, and other relevant agencies, all of which have shown an interest in recent years. RILA will also continue engaging at the state level to enact reasonable reforms to permit merchants to manage interchange fees.
For many years, the broader retail community has been pursuing legislation in Congress to combat excessive interchange fees. Over the past 18 months, RILA worked with member companies to develop and implement a comprehensive, strategic approach to effect interchange reform, relying upon key alliances with small business and consumer advocacy groups both in Washington, D.C. and outside the Capital Beltway. This approach ultimately achieved success in the amendment authored by Senator Durbin, included in the Dodd-Frank Act, which provides the Federal Reserve with significant authority to reform debit interchange fees, and was replicated in the successful defeat of the Tester-Corker Amendment to delay the interchange reforms in June 2011.
RILA serves as a member of the Merchants Payment Coalition’s (MPC) Executive Committee. The coalition is made up of retailers, restaurants, supermarkets, drug stores, convenience stores, gas stations, online merchants and other businesses that accept credit and debit cards. A number of these industry trade associations were involved in the antitrust litigation that settled in 2003, forcing Visa and MasterCard to lower interchange rates for signature debit transactions and untie the requirement that merchants accept both debit and credit cards.
The Nilson Report, a well respected payments newsletter, estimates that American businesses paid more than $64 billion in interchange fees in 2009, more than twice the amount paid by consumers in credit card late fees, overdraft fees, and other hidden fees. Unlike cash or check payments, merchants do not receive the full value of payment transactions that customers make with credit and debit cards. Rather, the credit or debit card issuing bank subtracts a “merchant discount” (e.g., 2 percent) from the amounts owed to the merchant for the privilege of accepting electronic payment from customers. While some of this discount reimburses the acquiring bank for services provided to the merchant, most of the discount reflects an interchange fee, charged by the issuing bank, which is subsequently passed through to the merchant.
Interchange fees do not reimburse the card associations themselves; rather, they are payments from one group of competing banks (acquirers) to another (overlapping) group of competing banks (card issuers) at a price collectively set by these competitors through their control over the credit card associations.
Interchange fees on merchants are used by card issuers to subsidize their marketing efforts and rewards programs and bolster their rapidly expanding bottom lines, among other things. In fact, Visa, MasterCard, American Express and Discover, have continued to report record earnings since the start of the recession despite the fact that during this same timeframe retail sales have plummeted due to a drop in consumer consumption. The use of interchange fees has allowed card companies to issue lines of credit without properly assessing risk, serving as a guaranteed source of revenue that has fueled the proliferation of cards to the point where the average consumer has nine cards today. In addition, the use of interchange fees provides cardholders with points, miles, concierge services and cash-back features and thus adds a substantial burden on the cost of goods and services that Americans of all income levels buy, especially cash paying customers who must pay more for the goods they purchase as a result.
On April 24, 2006, numerous merchants filed class action litigation challenging collectively set interchange fees, but the ultimate resolution of this litigation could be years away. While the class action lawsuit remains in a lengthy discovery phase, Congress and competition authorities around the world continue to take an increased notice of the exorbitant fees that credit card companies are charging merchants.
For more information, please contact Katherine Lugar, executive vice president, public affairs, at katherine.lugar@rila.org, Bill Hughes, senior vice president, government affairs, at bill.hughes@rila.org, or Andrew Szente, senior director of government affairs, at andrew.szente@rila.org.