U.S. District Court Strikes Down Durbin Price Caps

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What a couple of weeks for Senator Durbin and merchants! The Durbin amendment (capping debit card interchange or “swipe fees”) is back in the spotlight once again.

On July 31st, Judge Richard Leon of the U.S District Court for the District of Columbia found in favor a coalition of merchant groups including NACS and the NRF striking down the Fed’s 21 cent + 5 basis point cap on debit interchange. The ruling states that the Fed (tasked with implementing the law’s provisions) did not adhere to the law’s requirement to cap debit interchange rates to strictly “ACS” (authorization clearance and settlement) charges, nor did the Fed properly implement the provisions for multi-network routing. The Judge immediately issued a stay of his decision to allow lawmakers to revisit the topic without reverting to the much higher pre-Durbin rates.

Just before the ruling Senator Dick Durbin and Congressman Peter Welch wrote a letter to the Fed urging them to revisit their June 2011 ruling that set the 21 cent cap, and instead adopt the .2% cap recommended in an extensive multi-year study released by the EU Commission two weeks ago. The letter states that the .2% rate with an average debit ticket of $38.03 aligns much more closely with the original recommendations of $.07 cents.

The original fed decision reduced debit interchange by half for most mail order (MOTO) merchants, but this cap would bring that down another 60% to 75% or more depending on the sale amount.  

There is no doubt that interchange fees are established by merchant banks and networks that wield a tremendous amount of power. We are certainly far from perfect competition in this market, but as with my other posts on this topic I worry about a unilateral decision process and draconian cuts imposed. What unintended consequences will emerge this time? With the first caps we quickly saw that rates for small ticket merchants spiked drastically. We also saw some debit card benefits disappear, though certainly not to the extent the banks threatened.

The other item to keep an eye on is the second recommendation in the EU Commission report, echoed in the Durbin letter, which would cap credit card interchange at .3%. Using standard retail interchange of 1.65% + $.10 and an average ticket of $50 issuers would see their revenue cut from $0.925 to $0.15 or a reduction of 84%. If that happens you can say goodbye to your card rewards and certainly credit issuance will tighten if issuers lose 84% of their transaction revenue.

While interchange fees may be inflated they have evolved over the past 30+ years to accommodate all sorts of markets and provide easy access credit for consumers. That access to credit allows more people to spend more money with retailers. I agree that regulation is needed but all participants in the market should be careful about going too far.
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