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Court To Fed: Keep The (Inter)Change

August 8th, 2013

The Federal Court disagreed with the Fed’s interpretation of both the statute and the legislative debate. The Court concluded that Congress wanted costs split between those actual incremental costs directly associated with processing my debit card transaction for the cheeseburger and those overhead or other profit center costs of operating a bank. The former could be part of the interchange fee, the latter, not so much. But since the statute didn’t define what was directly associated with a transaction, the Fed said they could decide that anything was associated with a transaction, right? Wrong. As the Court explained:

The Board contends that the statute’s failure to define the terms “incremental cost” or “authorization, clearance, or settlement,” or to delineate which types of costs are “not specific to a particular electronic debit transaction,” renders those terms ambiguous, thereby giving the Board the authority to fill those statutory gaps. Not quite! If I were to accept the Board’s argument, then every term in the statute would have to be specifically defined or otherwise be deemed ambiguous. This result makes no sense, and more importantly, it is not the law. When a term is not defined in a statute, a court must assume that “the legislative purpose is expressed by the ordinary meaning of the words used.”

Moreover, Congress directed the Fed to look at the fees associated with writing a check when considering the “incremental costs” that should be allowed in debit card transactions. Writing checks is very expensive to merchants, banks, and even consumers, while debit cards are very cheap. Yet there are zero interchange fees charged to merchants for collecting and depositing checks. Clearly banks incur substantial overhead and transaction costs for accepting checks—they just don’t pass those on to merchants. That’s what it means to be a bank, right?

Ultimately the Court found that the Fed’s rule was too kind to banks and allowed them to collect a host of fees that had nothing to do with the actual costs of processing debit cards. It sent the Fed (and bank lobbyists) back to the drawing board to rehash what fees are directly associated with processing, and which ones were not. This will likely result in dramatically lower fees to merchants.

And lower costs to consumers? Not so much. As a result of the rules already in place, fees from merchants to banks have dropped by as much as 50 percent. But because the fees are so universal and so incorporated into the merchant’s business process, no individual merchant obtains a competitive advantage by reducing its prices over competitors simply because of the lower fee. Instead, mostly this translates into higher profits for merchants, and a greater incentive to accept debit cards.

If you disagree with me, I’ll see you in court, buddy. If you agree with me, however, I would love to hear from you.


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One Comment | Read Court To Fed: Keep The (Inter)Change

  1. terry Says:

    This was an easy way for merchants to effectively directly remove money from a customer’s bank account. The risk of default was low, as was the cost of processing. Merchants had to install new PIN-based POS terminals, but many banks and acquirers helped to subsidize these costs by setting the interchange fees at “par” (no fee) or even reverse fees as a subsidy.

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