Court Restores Fed’s Debit Interchange and Routing Rules
On March 21, 2014, the U.S. Court of Appeals for the D.C. Circuit reversed a trial court decision that had struck down the heart of the Federal Reserve’s Regulation II.
Regulation II, which implements the “Durbin Amendment” of the 2010 Dodd-Frank Act, imposes a cap on debit interchange transaction fees and mandates that most debit cards include at least two unaffiliated debit networks to enable merchant routing choice. The Federal Reserve released the final rule in 2011, and issuers and acquirers of debit transactions had spent two years adjusting to the new cost structure and developing solutions that comply with it.
Then, last July, in an opinion laced with rhetorical barbs and exclamation points, D.C. District Judge Richard Leon struck down the fundamental components of the Fed’s rule: the interchange cap (21-cent plus 5 basis points) and the requirement that cards carry two unaffiliated debit networks (the ruling suggested that cards would need to carry two unaffiliated signature cards, which today is not is not feasible from a technical standpoint).
Faced with the prospect of a potentially dramatic reduction in interchange revenue and major technological changes, Judge Leon’s ruling caused innovation in the industry to grind to a halt. The ruling proved especially troublesome because issuers and acquirers are facing an October 2015 deadline to implement EMV chip-card technology, which is designed to reduce some types of fraud. With the ruling and the ensuing appeal, many issuers and acquirers chose to sit on the sidelines to see if the decision would be upheld.
With the D.C. Circuit’s reinstatement of the rule, it is likely that issuers and acquirers will begin rolling out new chip-card technology and revive debit and prepaid card programs that had been placed on hold. Although the decision has been widely viewed as a victory for banks, the merchant community has made rumblings that it may appeal the decision.
The case is NACS v. FRS, 13-5270 (D.C. Cir. 2014).