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WASHINGTON, D.C. -- Sen. Richard Durbin (D-Ill.) recently filed a friend-of-the-court brief in support of the National Restaurant Association (NRA) and other merchant groups' lawsuit against the Federal Reserve Board, according to an NRA news report.
In the brief, the senator agrees with the merchant groups that the Federal Reserve regulation doesn't agree with the intent of an element of financial reform known as "the Durbin Amendment" and discusses several ways the regulation should be revised to meet the law.
The merchant groups' lawsuit, filed in November 2011, contends that the Federal Reserve failed to follow Congress' intent when the Fed issued regulations to curb debit card swipe fees. It aims to improve the Fed's rule, rather than stop its implementation.
The Fed's rules, which took effect in October 2011, implement the retail industry-supported Durbin Amendment. Congress passed the amendment in 2010 as part of the Dodd-Frank financial services reform bill. Durbin championed the measure, which aimed to contain merchants' escalating debit-fee costs by promoting more competition among major payment card networks and the banks that issue those cards.
The Durbin Amendment required the Fed to issue regulations to ensure debit card swipe fees were "reasonable and proportional" to the cost of processing debit transactions.
Durbin's recently filed brief highlights bad behavior by payment card networks and the negative impact on small-ticket debit transactions. The Fed's rule restricts large banks to a 21-cent-per-transaction swipe fee, plus a portion of the transaction amount. Although the new cap is less than the 44-cent average fee merchants paid before the law went into effect, it's had a perverse effect on a segment of merchants. For example, many quick-service operators with low-average ticket prices have seen rates climb because Visa and MasterCard raised their rates to the new cap.
"It's an absurd situation," Durbin stated in the brief, when card networks can charge a 22-cent interchange fee on the debit-card purchase of a 10-cent pencil.
The Fed's initial proposal for a 12-cent debit swipe-fee cap was more consistent with what Congress intended, Durbin said. But the financial services industry influenced the Federal Reserve to issue a final rule that deviated from Congress's intent, he relayed. Congress never intended to allow bank card companies to include fraud losses, network-processing fees and other costs in their standard, as the rule allows.
Furthermore, the Fed "twists and tortures" the meaning of the Durbin Amendment and tries to "split the baby" between big banks and merchants, Durbin added. He joined the NRA and the other plaintiffs in saying the Fed must go back and adjust its rule.
The Federal Reserve has until June 1 to submit its response.