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Fed seeks summary judgment in interchange case
WASHINGTON (4/17/12)--The Federal Reserve in a brief filed Friday asked the U.S. District Court for the District of Columbia to declare summary judgment in its favor in a case brought against the regulator by a coalition of retailer organizations seeking to invalidate the Fed's debit card interchange rule.

NACS, National Retail Federation, Food Marketing Institute, Miller Oil Co. Inc., Boscov's Department Store LLC, and the National Restaurant Association filed their own motion early last month, seeking a summary judgment ruling declaring the interchange rule and a network non-exclusivity regulation invalid.

The Fed's initial interchange proposal originally would have set a per-transaction debit interchange fee cap of between 7 and 12 cents per transaction. However, after receiving more than 11,500 comments, the Fed decided to add many costs related to debit card use, such as network connectivity, hardware, software, and labor costs, in the calculation of the final debit card interchange cap, and settled on a final debit interchange rule that caps fees for issuers with assets of $10 billion or more at 21 cents.

The merchants' motion claimed the Fed's interchange rule exceeds the authority granted to it by Congress, arguing that the final rule is "arbitrary, capricious" and "an abuse of process." (See related March 6 News Now story: Retailers file for summary judgment on interchange rule)

In its April 13 legal brief, the Fed argued that its final interchange fee regulation "complies in all respects" with the authority granted to the Fed by the U.S. Congress "to promulgate regulations regarding interchange transaction fees in debit card transactions and network exclusivity and routing."

The Fed also argued that Congress granted the Fed the authority to "consider other costs specific to a particular electronic debit transaction" as it developed the interchange fee regulation.

"Congress provided only limited guidance on how the Board should fulfill its statutory mission, and thereby expansively delegated to the Board authority to fill statutory gaps in establishing the statutory standard," the Fed said.

The merchants' claims that fixed authorization, clearance, or settlement (ACS) costs, transaction monitoring costs, fraud losses, and network processing fees should not have been included in the final interchange fee calculation were also challenged by the Fed brief. Nothing in the interchange statute prohibits the Fed "from taking network processing fees paid by issuers as part of the ACS costs considered as part of the interchange fee standard," the Fed's brief said.

The merchant representatives are scheduled to reply to the Fed's request for summary judgment on May 11. The Fed is then scheduled to reply to that merchants' brief on June 1.

The Credit Union National Association (CUNA) this year joined the Financial Services Roundtable, the Clearing House Association, the National Association of Federal Credit Unions, the Midsize Bank Coalition of America, the Independent Community Bankers of America, the Consumer Bankers Association, the National Bankers Association and the American Bankers Association to file a friend of the court brief asking the court to dismiss the merchant's case.

The friend of the court brief maintains that the final interchange fee is too low, as it does not allow debit card issuers to cover their costs and receive a reasonable rate of return on their investments. The joint brief also described how small and large financial institutions are harmed by the Fed's tight fee ceiling, and underscores that consumers have not seen any pricing benefits for products and services promised by the merchants when they were fighting for a government-set cap on what card issuers may charge for their services. (See related March 16 News Now story: CUNA, coalition seek dismissal of merchant interchange suit)


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