By Richard A. Epstein, Laurence A Tisch Professor of Law at New York University Law School
There is no end of surprises in dealing with the implementation of the Durbin Amendment, with its tough restrictions on debit interchange fees. The most recent chapter in that story was a decision by Judge Richard Leon, which at the bequest of industry retail groups, upset the 21-cent interchange fee that the Federal Reserve Board adopted in its 2011 regulations.
Durbin worked a massive shift in assigning the costs of running debit interchange. From the former market rates, the only costs that the Amendment explicitly allowed the were the “ACS” (authorization clearance and settlement) charges, which form only a small fraction—between three and six cents—of the total cost of running debit interchange. Sensitive to the massive shift in wealth, the Fed decided that it include some of the direct costs in setting up and running the system into the mix, which led it to settle on a 21-cent per transaction fee in 2011, about half of the market rate.
That decision was then challenged by a group of retail organizations who sought to limit the interchange costs to the ACS costs. Most people at the time thought that the issue would come to a rest, relying on the tried and true assumption that the federal courts would give extensive deference to the federal agency charged with the implementation of any complex statute. But that false optimism rested on too rosy a view of administrative law. Much as I dislike the Durbin Amendment, want of clarity is not one of its vices. Indeed its message is all too clear. The statute was drafted, one suspects, at the behest of Senator Durbin by and for the retail industry, whose veteran members knew how to write a clear statute, both on the question of interchange fees and on the statutory requirement that every debit card transaction be carried over two or more networks.
Judge Leon’s firm decision against the banks on both points raises a host of unpleasant alternatives for the covered banks. They can try their chances on appeal, but my guess is that the decision will be affirmed, so long as the only question is whether Judge Leon parsed the statute correctly, which, sadly, he did. The law divides the cost of all transactions into two parts: those which shall and those which shall not be allowed. There is no magic middle class that falls in the middle. There is no middle third category and there is no way to fiddle the statute to get to that conclusion.
Appellate judges may disagree with this analysis, but even bringing an appeal has its business risks, for the extra time will of course complicate matters if the costs of any fix increases. In addition, an appeal could have cost implications for the banks if Judge Leon orders some refund of the excess charges once the litigation comes to end.
With Judge Leon’s decision on the books, there is little point for the banks to run back to the Federal Reserve, which is powerless to recalibrate its cost recovery. And it will certainly be a real struggle to meet these technical requirements with both the banks and the retailers breathing down its neck. So in the end it is likely that this sorry mess will end up back in the lap of Congress, where Senator Durbin stands ready at the pass to thwart any reform—even a modest proposal that reinstates the Fed’s 21-cent ruling. On that matter, he should relent. His interference with market rates has already caused enough unwanted dislocation.
Richard A. Epstein is the Laurence A Tisch Professor of Law at New York University Law School; the Peter and Kirsten Bedford Senior Fellow, The Hoover Institution, and the James Parker Hall Distinguished Service Professor of Law and Senior Lecturer at the University of Chicago. He consulted for the TCF Bank on constitutional issues at the trial level in TCF National Bank v. Bernanke.
We’re always on the lookout for opportunities to partner with innovators and disruptors.
Learn More