Pub. 3 2013 Issue 4

10 www.azbankers.org T h e Arizona banking industry is painfully aware that in 2010 Congress enacted the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Act”). The Act incorpo- rated the so-called Durbin Amendment, which directed the Board of Governors of the Federal Reserve System (the “Board”) to promulgate regulations to limit debit card interchange transaction fees and eliminate the debit card issuer practice of network exclusivity for routing debit transactions. The Board responded on July 29, 2011, by issuing Regulation II—Debit Card Interchange Fees and Routing (“Regulation II”). Regulation II caps the permitted debit card issuer interchange transaction fee at twenty-one cents, plus an ad valorem amount of five basis points (0.05%) of the amount of the transaction. Further, Regulation II allows debit card issuers to comply with the Act’s network exclusivity prohibition by ensuring that each debit card issued is enabled with at least two unaffiliated debit authorization networks, even if one network only processes signature authorized trans- actions and the other network only processes PIN authorized transactions. A group of retailers and their trade associations (the “Plaintiffs”) challenged Regulation II by filing a lawsuit in the United States District Court for the District of Columbia. The Plaintiffs argued that the Board, in two separate instanc- es, ignored the intent of Congress when issuing Regulation II. First, the Plaintiffs argued that when the Board calculated the twenty-one cent plus five-basis-point interchange trans- action fee limit, the Board improperly considered debit card issuer costs above and beyond those costs Congress permitted. The Act allows debit card issuers to consider “incremen- tal cost[s] incurred by an issuer . . . in the authorization, clearance, or settlement of a particular electronic debit trans- action.” These costs are referred to as “incremental costs.” Further, the Act prohibits debit card issuers from considering “costs incurred by an issuer which are not specific to a par- ticular electronic debit transaction.” The Board interprets the Act as allowing the specified incremental costs and also allowing certain fixed costs such as “(1) fixed costs related to processing a particular transac- tion, such as network connectivity and software, hardware, D.C. District Court Slams Federal Reserve and Regulation II By Jeremy M. Goodman and Theodore “Ted” F. Stokes Debit Card Interchange Fees and Routing: