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Retailers charge interchange rule ignores cap intent
WASHINGTON (11/23/11)— Retailers have filed suit against the Federal Reserve, alleging that its final debit interchange rule ignores the direction of the statute that requires a cap and fails to set standards to assess that a fee is "reasonable and proportional" to costs incurred to the issuer.

The lawsuit said the Fed's early proposal to set a cap closer to 12 cents per transaction "largely followed" the intent of the law. The suit has been brought against the Fed in U.S. District Court for the District of Columbia by the National Association of Convenience Stores, the National Retail Federation, the Food Marketing Institute, Miller Oil Co., Inc., and Boscov's Department Store, LLC.

In the complaint, the merchants claim the Fed's final rule, which was released after the agency received input from both merchants and financial services groups, represents "an unreasonable construction' of Durbin's legislation.

The Fed's initial interchange proposal, which was prompted by legislation authored by Sen. Richard Durbin (D-Ill.), would have set a cap of 12 cents per transaction. However, the Federal Reserve's final debit interchange rule, which became effective last month, caps debit interchange fees for issuers with assets of $10 billion or more at 21 cents. The regulation also allows card issuers to charge an additional five basis points of the value of the transaction to cover fraud losses. An extra penny may also be charged by financial institutions that are in compliance with the Fed's fraud-prevention standards. 

The complaint also takes issue with the Fed's decision to consider many costs related to debit card use, such as network connectivity, hardware, software, and labor costs, as well as costs related to network processing and transaction monitoring, in the calculation of the final debit card interchange cap. The merchants in the complaint claimed the Fed "vastly expanded the categories of recoverable costs" when it developed the final rule.

The Credit Union National Association (CUNA) fought to ensure that these costs were included in the final debit interchange fee cap determination.

CUNA General Counsel Eric Richard said CUNA is carefully watching this suit and will do whatever is necessary to protect the interests of credit unions in this litigation.

"Given the merchants' reaction to the final rule, this litigation is not surprising. However, while we can't predict the outcome of the litigation, it is clear that the Federal Reserve did not focus on the desires of the merchants, as the retailers urged it to do, but took into account factors identified by Congress in setting the cap on interchange fees," CUNA Deputy General Counsel Mary Dunn added.

For more on the merchant interchange action, use the resource link.


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