The Many Fronts of the Swipe Fee Battle
April 6, 2015 5:13 PM
Enactment of the Durbin amendment in the Dodd-Frank Act was just the start of a fight over implementing debit interchange rules. Retailers ultimately lost their legal effort to toughen the Federal Reserve's swipe fee cap, but they are now arguing that issuers offering Apple Pay service are skirting the Fed's regulation. Here's a look back at how the battle has played out.
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Limits on Debit Swipe Fees Become Law
As lawmakers debated the 2010 regulatory overhaul later known as the Dodd-Frank Act, Sen. Richard Durbin, D-Ill., offered an amendment unrelated to the financial crisis to require Federal Reserve Board rules restricting debit swipe fees. Under the law, debit interchange fees had to be "reasonable and proportional" with the cost of processing a payment, though the amendment exempted banks with less than $10 billion in assets. The provision also required issuers to ensure payments could be routed through at least two unaffiliated networks.
Image: Bloomberg News
Fed Issues New Interchange Fee Cap
After first proposing a lower fee limit, the Fed's 2011 final rule ultimately capped debit interchange fees at 24 cents per transaction. To comply with the dual routing requirement, the Fed said banks could issue debit cards that carry one PIN debit network and one signature debit networks, as long as the two networks were unaffiliated.
Judge Calls Fed Rule 'Utterly Indefensible'
Despite the new regulation, merchants and Durbin himself called the Fed's rule inadequate, saying the central bank set the cap too high. After retailers sued the Fed, they won agreement in a 2013 ruling from U.S. District Judge Richard Leon, who overturned both the fee limit and the dual routing rules. "In short, the
[Fed's] interpretation is utterly indefensible," Leon said in his strongly worded decision.
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Appeals Court Sides with Fed
Banks scored a huge victory when a three-judge panel for the U.S. Court of Appeals for the District of Columbia overturned Leon's ruling, thereby cementing the Fed's rule. The appeals court appeared sympathetic to the Fed's position during oral arguments. After retailers argued the law required the Fed to rely only on processor costs specified in Dodd-Frank when setting the cap, Judge Harry Edwards said, "None of us buy that."
Legal Battle Ends at Steps of Supreme Court
The legal fight over the Durbin amendment ceased as retailers' lost their bid to argue their case before the Supreme Court. The high court's denial of the merchants' petition for a hearing appeared to signal the matter would be resolved once and for all.
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Merchants Allege Compliance Issues with Apple Pay
Retailers and payments industry observers say the introduction of Apple Pay and other contactless services run afoul of the Durbin amendment's dual routing provisions by directing debit transactions by default through the Visa and MasterCard signature networks, hiding access to the alternative PIN debit networks.
Image: Bloomberg News
