Battle Over Durbin Rages On as Banks Fire Back at Merchants in Court Papers

WASHINGTON — The epic battle between banks and retailers over interchange fees, which first moved from the halls of Congress to the Federal Reserve, is now being fought in court.

A group of financial industry trade groups intervened Thursday in a lawsuit brought by retailers against the Fed. The merchants' lawsuit alleges that the central bank strayed from the instructions of Congress when it allowed banks to charge roughly 22 cents for each debit-card transaction.

But in a 47-page brief filed in U.S. District Court, a broad coalition of financial institutions argued the opposite — that the Fed went too far in restricting the fees they are allowed to charge under the Durbin Amendment.

"The final rule is flawed, but for reasons that are diametrically opposite of those presented by the merchants," the financial institutions stated in their brief.

"Far from improving consumer welfare, the Final Rule leads to reduced financial services and higher fees for millions of Americans. It also threatens to reduce lending and investment by banks and credit unions during an already fragile economic recovery. The final rule will not benefit merchants' customers, but rather will only serve to line the pockets of merchants."

The Durbin Amendment, enacted in 2010 as part of the Dodd-Frank Act, instructed the Fed to establish fees that are reasonable and proportional to the financial institution's cost for the transaction.

In their brief, the financial institutions argue that the Fed's rule will cost them an anticipated $6 billion to $8 billion in annual revenue.

"The merchants bring their lawsuit in pursuit of even deeper cuts in issuers' interchange-fee revenues, seeking to reap the benefits of debit card transactions and innovation in the electronic-payments system practically for free — an unwarranted, unfair, and unprecedented windfall," the brief states.

The brief was signed by the American Bankers Association, the Consumer Bankers Association, the Independent Community Bankers of America, the Clearing House Association, the National Bankers Association, the Financial Services Roundtable, the Mid-Size Bank Coalition of America, the National Association of Federal Credit Unions, and the Credit Union National Association.

"The retailers, we think, have gone too far in suggesting that the Fed went too far," Bill Cheney, president of the Credit Union National Association, said in an interview.

Cheney said that it is important for small financial institutions to stand together with larger ones, even though the Durbin Amendment provided an exception from the pricing rules for institutions with under $10 billion of assets.

But he acknowledged that the exemption for small banks and credit unions from the 22-cent cap seems to be working so far.

Still, he noted that provisions of the Durbin Amendment involving network exclusivity have yet to have an impact — they are scheduled to take effect on April 1 — and those provisions do not exempt small financial institutions.

"So we have great concerns about how this is going to affect our members," Cheney said, "and we're concerned it is going to impact all of our members."

The initial suit was filed by three retail trade groups — the National Retail Federation, the National Association of Convenience Stores and the Food Marketing Institute. Their lawsuit argues that the Fed’s initial proposal, which would have capped such fees at 12 cents, complied with the intent of lawmakers. At the time the retailers filed suit, they argued that the Fed caved to pressure from banks when it raised the cap.