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Deciphering the Durbin debit ruling

A look at what's next after the U.S. District Court decision that put a stick in the wheel of EMV at the ATM.

October 25, 2013 by Suzanne Cluckey — Owner, Suzanne Cluckey Communications

There was something to dismay all industry stakeholders in U.S. District Court Judge Richard Leon's July 31 ruling in NACS v. Federal Reserve System (Civil Case No. 11-02075).

In calling for "vacatur and remand" of the Fed's swipe fee cap of 21 cents on debit transactions, Judge Leon sent a shockwave through banks that were just regaining their equilibrium after a 23 cent cut to the previous rate.

In mandating the same in respect to rule-making for debit transactions, Leon also gave a jolt to every player in payments — including just about every U.S. ATM deployer — working toward a common AID for EMV.

Vacating the current rules would have meant a return to "unfettered" fees until new rules were in place, so Leon issued a stay on his decision, leaving the current system in place for a time.

The stay has since become indefinite since the Fed announced on Aug. 21 that it would appeal Leon's decision. And with that, the matter of swipe fees and network routing choice entered an uncertain state for an undetermined duration.

At the ATM & Mobile Executive Summit, experts on regulatory law and banking issues offered insights into possible outcomes and timelines in the ongoing court battle between NACS et al. and the Federal Reserve System.

The Chevron Doctrine

Crystal Kaldjob, an associate in Goodwin Proctor's practices in consumer financial services and banking, explained a key aspect of the ruling — "Chevron deference."

"It's a doctrine that came out of a 1984 Supreme Court case, which generally stands for the principle that courts should give deference to administrative agencies when interpreting statutes and promulgating rules, so long as the rule is reasonable and not contrary to the statute," she said.

The Chevron doctrine involves a two-part test: First, the court looks at legislative history to determine whether Congress has spoken directly to the question at issue. If so, that's the end of the matter.

If the court concludes that the statute is silent or ambiguous on the point, they defer to the administrative agency's interpretation of the statute.

Kaldjob said that Judge Leon's analysis of Chevron in relation to the interchange case was thorough and "pretty convincing," and it would be hard for the appellate court to overturn the ruling based on Chevron. On the other hand, she said, "the Fed is a well respected agency with a well-established history of getting deference from the courts."

But regardless of which way the appellate court ruled, the loser was almost certain to petition the Supreme Court to hear the case. But it could be awhile.

On Oct. 14, parties on both sides submitted supplemental briefs; reply briefs are due in December, and oral arguments probably will be scheduled weeks or months after that, Kaldjob said.

But it's unlikely that an appeals court decision will come in time to meet SCOTUS' February deadline for certiorari (a brief asking the court to hear the case). This means that "cert" would have to wait until February 2015. And if accepted, the case wouldn't be decided until sometime in June or early July of 2016.

Outcomes and implications

Casey Merolla, a senior manager at First Annapolis Consulting, said a long wait would be tough on the affected parties.

"I would say that the worst part about this for the business community and the financial services community isn't the potential outcomes, but really the long period of uncertainty," she said.

"In some respects it's paralyzed financial providers who are now uncertain whether they should put money into debit products and programs; it's made planning impossible — EMV has been put on the back burner."

If the Leon ruling is upheld, FIs would have to weigh a number of alternatives to mitigate the loss of fee income.

A radical approach

Merolla said that when Dodd-Frank first passed and 7 cent to 12 cent interchange seemed inevitable, some FIs honed in on the Durbin Amendment's discussion of debit as a functionally similar to a check.

"So maybe in moments of initial anger and despair, [they] talked about, 'Well if you want your debit functionally equivalent to a check, then we will make your debit transaction functionally equivalent to a check.'"

These FIs looked at the possibility of dropping payment guarantees and same-day/next-day settlement benefits. But they dropped the idea when the final fee cap came out at 21 cents.

Now that the 12 cent fee cap has reared its head again, "we do expect issuers to start thinking about this a little more," Merolla said.

A win for the consumer?

"We have not been able to prove that there's been any sort of reduction in the actual price of goods at any specific merchant," Merolla said. "However, what the merchant lobby and the merchant groups would say is that it's not going to be specific … those merchants might be able to have sales that last for longer or more reward programs or incentives or coupons … But in reality it has just been a transfer of funds from the large banks to the large merchants."

In the process, consumers have lost most of their FI freebies. "[T]hose were being paid for and funded through the debit interchange that the banks were enjoying," Merolla said. "[N]obody wants to just take a 50 or 75 percent haircut on their bottom line, so really the pricing for financial institution products has to go up."

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photo: rubygirl creations

About Suzanne Cluckey

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Suzanne’s editorial career has spanned three decades and encompassed all B2B and B2C communications formats. Her award-winning work has appeared in trade and consumer media in the United States and internationally.