Durbin’s trade battles resurface – Consumer Protection

The Fed’s final rule implementing the Durbin Amendment (Regulation II) went into effect in October 2011. Almost ten years later, the final rule still sparks controversy in the form of a retrial and proposals. amendments to the rule and its official commentary.

The Durbin Amendment (Dodd-Frank Section 1075) authorized the Fed to issue regulations to ensure that the amount of any interchange fees received by a major debit card issuer (one with at least $ 10 billion dollars in assets, as well as its affiliates) is reasonable and commensurate with the cost to the issuer. It also limited the restrictions that payment card issuers and networks can place on the processing of an electronic debit card transaction.

New trial. The North Dakota Retail Association and the North Dakota Petroleum Marketers Association filed a lawsuit on April 29, 2021 against the Federal Reserve Board in a federal district court in North Dakota to overturn the Standard of Regulation II for reasonable and proportionate interchange fees. Regulation II capped the interchange fees received by large issuers (with $ 10 billion or more in assets) at 21 cents plus 0.05% of the transaction. It also allowed a 1 cent adjustment if the issuer applies fraud prevention standards.

In 2014, in NACS v Federal Reserve Board of Governors, the DC Circuit overturned a lower court ruling finding Regulation II violated the Administrative Procedure Act (APA). He confirmed Rule II as a reasonable interpretation of the Durbin Amendment limits on debit card interchange fees and network exclusivity.

In their recently filed complaint, trade associations allege Regulation II violates the APA because it is against the law and represents an arbitrary and capricious action by the agency. Among other things, the associations claim that the Durbin Amendment only allows the Fed to account for the additional costs associated with authorizing, clearing and settling a particular debit transaction (ACS costs). They argue, in the alternative, that even though the Durbin Amendment allowed for more than just the additional costs of GBA to be taken into account, “ it precludes the Committee from considering the specific additional costs that it invoked to support the rule: (1) fixed ACS costs, (2) fraud losses, (3) transaction monitoring costs, and (4) network processing fees. “They also claim that even though the Durbin Amendment allows the Fed to account for more than the additional costs of the ACS and these four costs are other eligible costs, the Fed did not have the authority to set a single ceiling.

Proposal for amendment of the Regulation II. The Fed proposed changes to Regulation II and its official commentary clarify that debit card issuers should allow, and allow merchants to choose, at least two unaffiliated networks for cardless debit card transactions, such as online shopping. Comments on the proposal are due 60 days from the date of its publication in the Federal Register.

Regulation II requires at least two unaffiliated payment card networks to be activated on a debit card to process debit card transactions. In its substantive discussion of the proposal, the Fed says that by the time it enacted Regulation II, the market had not developed solutions to broadly support multiple networks over which traders could choose to route goods. card-less transactions. He observes that, although technology has subsequently evolved to allow multiple networks for these transactions, data collected by the Council and information from industry players indicate that two unaffiliated networks are often not available to process transactions. by debit card without a debit card, as some issuers do not. activate two networks for these transactions. According to the Fed, in the absence of at least two unaffiliated networks for cardless transactions, merchants are unable to choose between competing networks when routing these transactions. He comments that the continued growth of online transactions, especially due to the pandemic, has brought this issue to light.

The proposed revisions (1) would clarify that the regulation’s requirement that each debit card transaction must be able to be processed on at least two unaffiliated payment card networks applies to cardless transactions, (ii) clarify the requirements that the regulation imposes on debit card issuers to ensure that at least two unaffiliated payment card networks have been activated for debit card transactions, and (iii) standardize and clarify the use of certain terminologies. Notably, the Fed called its changes clarifications rather than changes to existing law.

The proposal quickly met with criticism from major banking industry groups, including the American Bankers Association, the Consumer Bankers Association and the Bank Policy Institute. In one joint statement, groups called the Durbin Amendment “flawed from the start, making it harder for banks and credit unions to serve consumers, leading to unintended consequences for financial institutions and breaking its promise to cut prices Retail”. They said:

The Fed’s decision to review Reg II risks causing even more harm to consumers. The Fed’s own study of debit card transactions, both in-person and online, shows that merchants and consumers are increasingly benefiting from significant investments in innovation and built-in fraud detection. the country’s payment rails today. By reopening the rules for debit card transactions, the Fed could endanger the convenience, safety and security Americans expect when using their debit cards. We will vigorously oppose any attempt to undermine the payments system at the expense of consumers.

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought on your particular situation.