Durbin amendment

The Durbin Amendment, passed as part of the Dodd-Frank financial reform legislation in 2010, required the Federal Reserve to limit fees charged to retailers for debit card processing.

Initial Federal Reserve rule

Swipe fees are paid to banks by merchants for the privilege of accepting payment cards. Merchants and card-issuing banks have long fought over these fees. Merchants lobbied heavily for a rule to limit debit card swipe fees. They accomplished this when the Durbin Amendment passed with the Dodd-Frank financial reform legislation. This was considered a major loss for banks, who receive billions of dollars a year in income from swipe fees.

The rule that the Federal Reserve issued went into effect on 1 October 2010 and capped the interchange rate paid to non-exempt card issuers at 0.05 percent plus twenty-one cents. The rule also allowed these non-exempt card issuers to earn an additional one-cent fraud prevention adjustment for implementation of fraud prevention policies. The Merchant Payments Coalition (MPC) argued that this rule was unfair as the Durbin Amendment required the Federal Reserve to ensure that banks take effective steps against fraud and determine how much of the cost banks should bear themselves. The MPC said that banks should actually have to reduce fraud before receiving more funds. The MPC pointed out that the common practice of having customers merely signing for debit card purchases processed through the Visa and MasterCard payment networks instead of requiring a PIN greatly increases fraud.

Litigation

A coalition of merchants sued the Federal Reserve, arguing that the rule it imposed exceeded the authority granted by Congress.

In July 2013, U.S. District Judge Richard Leon ruled that the Federal Reserve did not comply with the Durbin Amendment when crafting a rule to limit debit card swipe fees. The opinion was generally scathing and noted that the agency overruled its own staff, who had recommended a cap of 12 cents per transaction. The judge wrote, "The court concludes that the [Federal Reserve] Board has clearly disregarded Congress' statutory intent by inappropriately inflating all debit-card transaction fees by billions of dollars." The judge also ruled that the Federal Reserve failed to ensure that merchants enjoy access to "multiple unaffiliated networks" to process each debit-card transaction, as also required by the Durbin Amendment.

Due to Judge Leon's ruling, the Federal Reserve must re-write its rule governing the cap on debit card swipe fees. The judge asked that the Federal Reserve implement a temporary regulation as well.

The Federal Reserve will appeal Judge Leon's decision. The banking industry had vocally called for an appeal. Trade groups representing retailers opposed the Federal Reserve's appeal. J. Craig Shearman of the National Retail Federation said, "The Fed has taken a position that will drag this out while retailers and their customers continue to pay billions of dollars in inflated fees that harm the U.S. economy. We want to see this case resolved today, not next year."