The Durbin amendment, implemented by Regulation II, is a provision of United States federal law, , that requires the

Federal Reserve The Federal Reserve System (often shortened to the Federal Reserve, or simply the Fed) is the central banking system of the United States. It was created on December 23, 1913, with the enactment of the Federal Reserve Act, after a series of ...

to limit fees charged to retailers for

debit card A debit card, also known as a check card or bank card, is a payment card that can be used in place of cash to make purchases. The card usually consists of the bank's name, a card number, the cardholder's name, and an expiration date, on either ...

processing. It was passed as part of the Dodd–Frank financial reform legislation in 2010, as a last-minute addition by

Dick Durbin Richard Joseph Durbin (born November 21, 1944) is an American lawyer and politician serving as the Seniority in the United States Senate, senior United States senator from the state of Illinois, a seat he has held since 1997. A member of the Dem ...

, a senator from Illinois, after whom the amendment is named. After the rule to limit fees, 12 C.F.R. §235, went into effect, a coalition of merchants sued the Federal Reserve. The rule was upheld when the Supreme Court denied petition for

certiorari In law, ''certiorari'' is a court process to seek judicial review of a decision of a lower court or government agency. ''Certiorari'' comes from the name of a prerogative writ in England, issued by a superior court to direct that the recor ...

in 2014.

Background

Interchange fees An interchange fee is a fee paid between banks for the acceptance of card-based transactions. Usually for sales/services transactions it is a fee that a merchant's bank (the "acquiring bank") pays a customer's bank (the "issuing bank"). In a ...

or "debit card swipe fees" are paid to banks by acquirers for the privilege of accepting

payment cards Payment cards are part of a payment system issued by financial institutions, such as a bank, to a customer that enables its owner (the cardholder) to access the funds in the customer's designated bank accounts, or through a credit account and mak ...

. Merchants and card-issuing banks have long fought over these fees. Prior to the Durbin amendment, card swipe fees were previously unregulated and averaged about 44 cents per transaction. Merchants lobbied heavily for a rule to limit debit card swipe fees. They accomplished this when the Durbin amendment passed with the Dodd-Frank financial reform legislation on July 21, 2010. This was considered a major loss for banks, who receive billions of dollars a year in income from swipe fees. The law applies to banks with over $10 billion in assets, and these banks would have to charge debit card interchange fees that are "reasonable and proportional to the actual cost" of processing the transaction. The bill aimed to restrict anti-competitive practices and encourage competition, and included provisions which allow retailers to refuse to use credit cards for small purchases and offer incentives for using cash or another type of card. The Durbin amendment also gave the Federal Reserve the power to regulate debit card interchange fees, and on December 16, 2010, the Fed proposed a maximum interchange fee of 12 cents per debit card transaction, which CardHub.com estimated would cost large banks $14 billion annually. On June 29, 2011, the Fed issued its final rule, which holds that the maximum interchange fee an issuer can receive from a single debit card transaction is 21 cents plus 5

basis points A basis point (often abbreviated as bp, often pronounced as "bip" or "beep") is one hundredth of 1 percentage point. Changes of interest rates are often stated in basis points. For example, if an existing interest rate of 10 percent is increased ...

multiplied by the amount of the transaction. This rule also allows issuers to raise their interchange fees by as much as one cent if they implement certain fraud-prevention measures. An issuer eligible for this adjustment, could therefore receive an interchange fee of as much as 24 cents for the average debit card transaction (valued at $38), according to the Federal Reserve. This cap—which took effect on October 1, 2011, rather than July 21, 2011, as was previously announced—reduces fees by roughly $9.4 billion annually. As a result, banks made plans to raise account maintenance fees to compensate.

Federal Reserve Rule

The rule that the

issued went into effect on October 1, 2011 and capped the interchange rate paid to non-exempt card issuers at 0.05 percent plus twenty-one cents. The rule also allowed these non-exempt card issuers to earn an additional one-cent fraud prevention adjustment for implementation of fraud prevention policies.

Response to the rule

Merchants and card-issuing banks opposed the Federal Reserve rule. The Merchant Payments Coalition (MPC) argued that this rule was unfair as the Durbin amendment required the Federal Reserve to ensure that banks take effective steps against fraud and determine how much of the cost banks should bear themselves. The MPC said that banks should actually have to reduce fraud before receiving more funds. The MPC pointed out that the common practice of having customers merely signing for debit card purchases processed through the Visa and MasterCard payment networks instead of requiring a PIN greatly increases fraud. The

American Bankers Association The American Bankers Association (ABA) is an American trade association for the U.S. banking industry, founded in 1875. They lobby for banks of all sizes and bank charters, including community banks, regional and money center banks, Federal s ...

opposed the rule because it represents an "unprecedented transfer in costs from retailers to consumers – the result of government price fixing" leading to "consumers paying higher fees for basic bank services."

Litigation against the rule

A coalition of merchants including the

National Association of Convenience Stores The National Association of Convenience Stores (NACS) is a trade association representing the convenience and fuel retailing industry. Founded in 1961, NACS has thousands of member companies, primarily in the United States but also in about 50 ot ...

(NACS) and

National Restaurant Association The National Restaurant Association is a restaurant industry business association in the United States, representing more than 380,000 restaurant locations. It also operates the National Restaurant Association Educational Foundation. The associa ...

sued the Federal Reserve and argued the rule exceeded the authority granted by Congress.

District court

In July 2013, U.S. District Judge Richard J. Leon ruled that the Federal Reserve did not comply with the Durbin amendment when crafting a rule to limit debit card swipe fees. Judge Leon ordered the Federal Reserve to re-write its rule governing the cap on debit card swipe fees and implement a temporary regulation as well. The opinion was generally scathing and noted that the agency overruled its own staff, who had recommended a cap of 12 cents per transaction. Judge Leon held the Federal Reserve Board "clearly disregarded Congress' statutory intent by inappropriately inflating all debit-card transaction fees by billions of dollars." The judge also ruled that the Federal Reserve failed to ensure that merchants enjoy access to "multiple unaffiliated networks" to process each debit-card transaction, as also required by the Durbin amendment.

Court of Appeals

The D.C. Circuit Court of Appeals reversed and held the Federal Reserve reasonably interpreted Congress' intent of the Durbin amendment through its 2011 rule limiting swipe fees. "Given that the Board's rule advances the Durbin amendment's purpose, we decline to second-guess its reasoned decision to reject an alternative option that might have further advanced the purpose." The three judge panel noted that "Congress put the Board, the district court and us in a real bind...given that the Durbin amendment was crafted in conference committee at the eleventh hour, its language is confusing and its structure convoluted."

Supreme Court

On August 18, 2014, NACS filed a petition for certiorari. On January 20, 2015, the Supreme Court denied NACS petition for certiorari. The decision upholds the Federal Reserve rule on the interchange rate paid to non-exempt card issuers at 0.05 percent plus twenty-one cents.Payment Processing Companies
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References

{{Federal Reserve System Financial regulation Financial crises Payment cards United States federal banking legislation Acts of the 111th United States Congress Dick Durbin