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Case 1:11-cv-02075-RJL Document 22 Filed 04/03/12 Page 1 of 47

UNITED STATES DISTRICT COURT

DISTRICT OF COLUMBIA



_____________________________________

NACS; NATIONAL RETAIL
FEDERATION; FOOD MARKETING
INSTITUTE; MILLER OIL CO.; BOSCOV’S
DEPARTMENT STORE, LLC; and
NATIONAL RESTAURANT
ASSOCIATION,


Plaintiffs,

v.




BOARD OF GOVERNORS OF THE
FEDERAL RESERVE SYSTEM,


Defendant.



_____________________________________









No. 1:11-cv-02075-RJL







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BRIEF AMICI CURIAE OF THE CLEARING HOUSE ASSOCIATION L.L.C.,

AMERICAN BANKERS ASSOCIATION, CONSUMER BANKERS ASSOCIATION,

CREDIT UNION NATIONAL ASSOCIATION, THE FINANCIAL SERVICES

ROUNDTABLE, INDEPENDENT COMMUNITY BANKERS OF AMERICA, MID-SIZE

BANK COALITION OF AMERICA, NATIONAL ASSOCIATION OF FEDERAL
CREDIT UNIONS, AND NATIONAL BANKERS ASSOCIATION IN SUPPORT OF

NEITHER PARTY

Christopher R. Lipsett (DC Bar No. 929216)
Noah A. Levine (pro hac vice pending)
WILMER CUTLER PICKERING
HALE AND DORR LLP
399 Park Avenue
New York, NY 10022
Tel: (212) 230-8800
Fax: (212 230-8888

H. Rodgin Cohen
Matthew A. Schwartz
SULLIVAN & CROMWELL LLP
125 Broad Street
New York, NY 10004

Seth P. Waxman (DC Bar No. 257337)

[email protected]

Steven P. Lehotsky (DC Bar No. 992725)
WILMER CUTLER PICKERING
HALE AND DORR LLP
1875 Pennsylvania Avenue, NW
Washington, DC 20006
Tel: (202) 663-6000
Fax: (202 663-6363

Paul Saltzman
Rob Hunter
THE CLEARING HOUSE ASSOCIATION L.L.C.
450 West 33rd Street
New York, NY 10001

(Additional counsel listed on signature pages)




Case 1:11-cv-02075-RJL Document 22 Filed 04/03/12 Page 2 of 47



TABLE OF CONTENTS

Pages

TABLE OF AUTHORITIES ......................................................................................................... iii

INTEREST OF AMICI CURIAE....................................................................................................1

INTRODUCTION ...........................................................................................................................1

BACKGROUND .............................................................................................................................3

I.

II.

ELECTRONIC DEBIT TRANSACTIONS .....................................................................................3

THE DURBIN AMENDMENT ...................................................................................................7

III.

THE BOARD’S PROPOSED RULE ............................................................................................9

A.

B.

Interchange-Fee Proposals.......................................................................................9

Network-Exclusivity Proposals .............................................................................10

IV.

V.

THE COMMENT PERIOD.......................................................................................................11

THE BOARD’S FINAL RULE .................................................................................................12

A.

B.

The Interchange-Fee Rule......................................................................................12

The Network-Exclusivity Rule ..............................................................................13

SUMMARY OF ARGUMENT .....................................................................................................13

ARGUMENT.................................................................................................................................15

I.

THE DURBIN AMENDMENT REQUIRES THE BOARD TO PERMIT ISSUERS TO RECEIVE
INTERCHANGE FEES THAT COVER THE COSTS OF EFFECTING ELECTRONIC DEBIT
CARD TRANSACTIONS PLUS A REASONABLE RETURN........................................................15

A.

B.

C.

The Durbin Amendment’s Text Requires That Interchange Fees Include
A Reasonable Return For Issuers...........................................................................15

The Canon Of Constitutional Avoidance Requires The Board To Interpret
The Durbin Amendment To Allow A Reasonable Rate Of Return.......................18

The Durbin Amendment’s Text Requires That Interchange Fees Allow
For Recovery Of All Costs Incurred By Issuers With Respect To Electronic
Debit Card Transactions ........................................................................................23



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II.

Case 1:11-cv-02075-RJL Document 22 Filed 04/03/12 Page 3 of 47

THE BELOW-COST FEE CAP IN THE BOARD’S FINAL RULE IS CONTRARY TO THE
PUBLIC INTEREST................................................................................................................27

A.

B.

C.

The Final Rule Imposes Significant Burdens Upon Consumers ...........................27

The Final Rule Imposes Serious Harm On Financial Institutions Of
All Sizes.................................................................................................................28

The Final Rule Grants A Windfall To Merchants With No Corresponding
Benefit To Consumers ...........................................................................................29

III.

THE DURBIN AMENDMENT DOES NOT REQUIRE ISSUERS TO ENABLE ADDITIONAL
NETWORKS FOR ELECTRONIC DEBIT TRANSACTIONS OR MULTIPLE NETWORKS FOR
EACH FORM OF TRANSACTION AUTHORIZATION................................................................31

CONCLUSION..............................................................................................................................34

APPENDIX





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TABLE OF AUTHORITIES


Aetna Casualty & Surety Co. v. Commissioner of Insurance, 263 N.E.2d 698

(Mass. 1970) ................................................................................................................19, 20

CASES

Brooks-Scanlon Co. v. Railroad Commission, 251 U.S. 396 (1920).............................................21

Calfarm Insurance Co. v. Deukmejian, 771 P.2d 1247 (Cal. 1989)........................................19, 20

Clark v. Martinez, 543 U.S. 371 (2005) ........................................................................................21

Duquesne Light Co. v. Barasch, 488 U.S. 299 (1989)...................................................................18

Edward J. DeBartolo Corp. v. Florida Gulf Coast Building & Construction Trades

Council, 485 U.S. 568 (1988) ............................................................................................18

ExxonMobil Oil Corp. v. FERC, 487 F.3d 945 (D.C. Cir. 2007) ..................................................17

Federal Power Commission v. Hope Natural Gas Co., 320 U.S. 591 (1944)...................17, 19, 20

Federal Power Commission v. Natural Gas Pipeline Co. of America,

315 U.S. 575 (1942)...........................................................................................................17

Guaranty National Insurance Co. v. Gates, 916 F.2d 508 (9th Cir. 1990) .............................19, 20

In re Permian Basin Area Rate Cases, 390 U.S. 747 (1968)...................................................17, 19

Michigan Bell Telephone Co. v. Engler, 257 F.3d 587 (6th Cir. 2001).............................19, 20, 21

Morales v. Trans World Airlines, Inc., 504 U.S. 374 (1992) ........................................................23

TCF National Bank v. Bernanke, 643 F.3d 1158 (8th Cir. 2011)..................................................21

University of Great Falls v. NLRB, 278 F.3d 1335 (D.C. Cir. 2002) ............................................18

Zadvydas v. Davis, 533 U.S. 678 (2001) .......................................................................................18


STATUTES


5 U.S.C. § 552(a)(4)(A)(i) .............................................................................................................16

5 U.S.C. § 552(a)(4)(A)(ii)(I) ........................................................................................................16

7 U.S.C. § 211(a) ...........................................................................................................................17

7 U.S.C. § 940f(c)(2) ....................................................................................................................16

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12 U.S.C. § 248(s)(1).....................................................................................................................16

15 U.S.C. § 717c(a)........................................................................................................................17

15 U.S.C. § 1693b(a)(2).................................................................................................................27

15 U.S.C § 1693b(a)(2)(B) ............................................................................................................27

15 U.S.C § 1693b(a)(3)..................................................................................................................27

15 U.S.C. § 1693o-2(a)(2) ..................................................................................................... passim

15 U.S.C. § 1693o-2(a)(3)(A)........................................................................................8, 15, 16, 23

15 U.S.C § 1693o-2(a)(4)(B)(i) .................................................................................................8, 24

15 U.S.C. § 1693o-2(a)(4)(B)(ii) ...............................................................................................8, 24

15 U.S.C. § 1693o-2(a)(5)(A)........................................................................................................13

15 U.S.C. § 1693o-2(a)(6)(A)....................................................................................................8, 29

15 U.S.C. § 1693o-2(b)(1)(A)....................................................................................................9, 31

15 U.S.C § 1693o-2(b)(1)(B)...........................................................................................................9

15 U.S.C § 1693o-2(c)(2)(A).........................................................................................................33

15 U.S.C. § 1693o-2(c)(5) .............................................................................................................33

16 U.S.C. § 824e(a)........................................................................................................................17

16 U.S.C. § 831k ...........................................................................................................................17

42 U.S.C. § 10222(a)(3).................................................................................................................16

Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203,

124 Stat. 1375 (2010)...............................................................................................7, 16, 27


Mich. Comp. Laws § 484.2102(y).................................................................................................19



REGULATIONS


12 C.F.R. § 235.3(a).......................................................................................................................12

12 C.F.R. § 235.3(b) ......................................................................................................................12

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12 C.F.R. § 235.4(a).......................................................................................................................12

12 C.F.R. § 235.4(b) ......................................................................................................................13

12 C.F.R. § 235.4(c).......................................................................................................................13

12 C.F.R. § 235.5(a)(1)..................................................................................................................29

12 C.F.R. § 235.7(a)(1)..................................................................................................................13

12 C.F.R. § 235.7(a)(2)..................................................................................................................13

Debit Card Interchange Fees and Routing,


75 Fed. Reg. 81,722 (Dec. 28, 2010)......................................................................... passim

76 Fed. Reg. 43,394 (July 20, 2011).......................................................................... passim

76 Fed. Reg. 43,478 (July 20, 2011)..................................................................................13


American Bankers Association Comment Letter (Feb. 22, 2011)...................................................4

OTHER AUTHORITIES

Bank and Credit Union Trade Associations Comment Letter (Feb. 22, 2011),

http://www.federalreserve.gov/SECRS/2011/November/20111103/R-1404/R-
1404_093011 _87717_421100193837_1.pdf ............................................................2, 4, 26

William J. Baumol et al., Contestable Markets and the Theory of Industry Structure

(1982).................................................................................................................................25


BB&T Corp. Comment Letter (Feb. 18, 2011)..............................................................................31

Senator Carper et al. Comment Letter (Dec. 9, 2010) .....................................................................8

Consumer Bankers Association Comment Letter (Feb. 22, 2011) ................................................31

David S. Evans et al., Economic Analysis of the Effects of the Federal Reserve Board’s

Proposed Debit Card Interchange Fee Regulations on Consumers and Small
Business (Feb. 22, 2011), http://www.federalreserve.gov/SECRS/2011/
March/20110308/R-1404/R1404_030811_69120_621655419027_1.pdf...................22, 30


David S. Evans & Richard Schmalensee, Markets with Two-Sided Platforms, 1 Issues in

Competition Law and Policy 667 (2008).............................................................................5









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David S. Evans et al., The Economic Principles for Establishing Reasonable Regulation
of Debit-Card Interchange Fees that Could Improve Consumer Welfare (Feb. 22,
2011), http://papers.ssrn.com/sol3/papers.cfm?abstract_id= 1769890............................5, 6


David S. Evans & Richard Schmalensee, The Economics of Interchange Fees and Their
Regulation: An Overview, MIT Sloan Working Paper No. 4548-05 (May 2005),
http://ssrn.com/abstract=744705........................................................................................30


Federal Reserve System, The 2010 Federal Reserve Payments Study (Dec. 8, 2010),

http://www.frbservices.org/files/communications/pdf/press/
2010_payments_study.pdf ...............................................................................................3, 4


GAO, Rising Interchange Fees Have Increased Costs for Merchants, but Options for

Reducing Fees Pose Challenges, GAO-10-45 (Nov. 2009) ..............................................30


Independent Community Bankers of America Comment Letter (Feb. 22, 2011) ...........................8

Oliver Ireland, Comment Letter on Debit Interchange Fees and Routing (Feb. 22, 2011) ...........26

Letter from Acting Comptroller of the Currency, John Walsh, to Jennifer Johnson, Board

of Governors of the Federal Reserve System (Mar. 4, 2011), http://www.federal
reserve.gov/SECRS/2011/March/20110308/R-1404/R-
1404_030711_69110_478769283129_1.pdf .....................................................................12


MasterCard Worldwide Comment Letter (Feb. 22, 2011)...............................................................4

Representative Owens et al. Comment Letter (Feb. 22, 2011)........................................................8

Andy Peters, Small Bankers Avoiding Big Interchange Losses—For Now, American
Banker (Jan. 31, 2012), http://www.americanbanker.com/issues/177_21/debit-
cards-Durbin-amendment-Dodd-Frank-1046230-1.html...................................................29


Robin A. Prager et al., Interchange Fees and Payment Card Networks: Economics,

Industry Developments, and Policy Issues (2009), http://www.federal
reserve.gov/pubs/feds/2009/200923/200923pap.pdf ...........................................5, 6, 28, 30


Robert Stillman et al., Regulatory Intervention in the Payment Card Industry by the

Reserve Bank of Australia (2008), http://www.crai.com/ecp/assets/Regulatory
_Intervention.pdf..........................................................................................................28, 30


Richard J. Sullivan, Can Smart Cards Reduce Payments Fraud and Identity Theft?

(2008), http://www.kansascityfed/org/Publicat/Econrev/PDF/3q08Sullivan.pdf................4


Jean-Charles Rochet & Jean Tirole, Two-Sided Markets: A Progress Report, 37 RAND J.

of Econ. 645 (2006) .............................................................................................................5



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Senate Banking Committee Hearing Transcript, LexisNexis (CQ Transcriptions

database), Feb. 17, 2011 ......................................................................................................8


U.S. Census Bureau, Banking, Finance & Insurance: Payment Systems, Consumer

Credit, Mortgage Debt (2012), http://www.census.gov/compendia/statab/
2012/tables/ 12s1187.pdf .................................................................................................3, 6

Webster’s Third New International Dictionary (2002)......................................................16, 17, 23




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INTEREST OF AMICI CURIAE

Amici, listed alphabetically in Appendix A to this brief, are an unprecedented coalition of

every major nationwide bank and credit union trade association in the United States. Over the

past several decades, amici’s members—many of which are issuers of debit cards and receive

debit card interchange fees—have collectively invested (and continue to invest) billions of

dollars to develop and maintain an efficient, convenient, and secure debit card payments system.

Throughout the rulemaking proceeding at issue in this case, amici unanimously opposed

the imposition of unreasonable price controls on debit card interchange fees under the Durbin

Amendment. Nevertheless, Defendant the Board of Governors of the Federal Reserve System

(“Federal Reserve Board” or “Board”) promulgated a rule (“Final Rule”) that caps the

interchange fees that issuers may receive for debit card transactions at an amount substantially

below what the Durbin Amendment requires (although at a higher level than the Board originally

proposed). The Final Rule thus grants merchants a multibillion-dollar windfall, capping fees

well below the market-based rates that merchants would otherwise pay for the considerable

benefits they receive through the electronic debit card payments system.

The merchants now ask the Court to direct the Board to impose even greater reductions

in debit-interchange fees, thus enabling the merchants to reap these benefits practically for free.

Amici’s members, which stand to suffer the consequences, therefore have a direct stake in the

outcome of this litigation.

INTRODUCTION

Amici do not appear before the Court to defend the Board’s Final Rule. Rather, amici

file this brief because it is important for the Court to be aware of the full spectrum of views from

all parties affected by the Durbin Amendment and the Board’s Final Rule before the Court



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adjudicates the merchants’ challenges to that rule. The Final Rule is flawed, but for reasons that

are diametrically opposite of those presented by the merchants.

The Board’s initial proposal was subject to extensive debate: the Board received more

than 11,500 comments on its proposal to slash issuers’ debit interchange fee revenues by

approximately $12 billion annually—more than 70 percent. The vast majority of the comments

the Board received were opposed to that proposal. The merchants generally favored the Board’s

original proposal, and sought (as they do now through their lawsuit) to extract billions of dollars

from financial institutions through a low price cap on interchange fees. Amici argued that the

Durbin Amendment required the Board to act in a much different way than its proposed rule

suggested (and its Final Rule imposed).1 Amici explained that the statute required the Board to

issue regulations that permit issuers to recover their costs in connection with debit card

transactions and to receive a reasonable return above those costs.

Although the Board’s Final Rule represents an improvement over its original proposal,

the Final Rule still prevents issuers from recovering interchange fees sufficient to cover the costs

of electronic debit services and still fails to incorporate a reasonable rate of return above those

costs. Unlike the merchants, amici have not instituted litigation to challenge the Board’s Final

Rule, at least at this time. But amici strongly believe that the statute required the Board to permit

issuers to recover more costs than the Final Rule permits, as well as a reasonable return. Nothing

in the Durbin Amendment directed the Board to force issuers to subsidize merchants’ use of the

electronic debit payments system. Amici’s position directly contrasts with the central premise of

See Bank and Credit Union Trade Associations Comment Letter (Feb. 22, 2011),


1
http://www.federalreserve.gov/SECRS/2011/November/20111103/R-1404/R-1404_093011
_87717_421100193837_1.pdf. All comment letters cited in this brief may be found at the
Board’s web site, http://www.federalreserve.gov/apps/oia/ViewAllComments.aspx ?doc_id=R-
1404&doc_ver=1.



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the merchants’ lawsuit, which faults the Board instead for not setting its cap on interchange fees

even more deeply below issuers’ cost levels.

I.

ELECTRONIC DEBIT TRANSACTIONS

BACKGROUND

Over the past several decades, the financial institutions represented by amici have

collectively invested (and continue to invest) billions of dollars to develop, maintain, and

improve an efficient, convenient, innovative, and secure debit card payments system. As a result

of that investment, debit cards have become the primary form of non-cash payment for millions

of Americans and tens of thousands of merchants, who conducted almost 38 billion transactions

worth more than $1.4 trillion in 2009 alone.2 During 2009, debit cards constituted 35% of all

non-cash transactions, compared to 20% for credit cards and 22% for checks.3 The importance

of debit cards to the economy is reflected in their proliferation, growing from 235 million cards

in 2000 to 509 million cards in 2009, with estimates of 530 million cards in use in 2012.4

The innovation of electronic debit card payment has produced a tremendous economic

boon for consumers, merchants, the financial-services industry, and the country as a whole.

Consumers benefit from an efficient, prompt, convenient, and secure method of payment.

Merchants, in turn, are able to accept customers’ preferred method of payment to facilitate

efficient, prompt, and convenient service in stores, at unattended locations (e.g., gas pumps), and

See Debit Card Interchange Fees and Routing, 76 Fed. Reg. 43,394, 43,395, 43,397 (July

online, which in turn attracts more customers and increases merchants’ sales volumes and

2
20, 2011); Federal Reserve System, The 2010 Federal Reserve Payments Study, at 16 (Dec. 8,
2010), http://www.frbservices.org/files/communications/pdf/press/2010_payments_study.pdf.

3

See The 2010 Federal Reserve Payments Study, at 5, 14.

See U.S. Census Bureau, Banking, Finance & Insurance: Payment Systems, Consumer

4
Credit, Mortgage Debt (2012), http://www.census.gov/compendia/statab/2012/tables/
12s1187.pdf (Table 1187) (“Census Bureau, Debit Table 1187”).



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profits. Debit transactions also enable both consumers and merchants to avoid the safety and

security risks—misappropriation, theft, robbery, and so forth—associated with cash and check

transactions.5

Electronic debit payment also has special value to merchants over checks—a guarantee

against insufficient funds and fraud. Under the electronic debit card payments system, debit card

issuers, rather than merchants, bear the full risk of insufficient customer funds in the underlying

deposit account (credit losses) and bear most of the risk of fraud (fraud losses). That is not the

case for checks, where merchants retain those risks themselves—risks that cost merchants

billions of dollars each year. In 2009, for example, the total value of checks returned unpaid was

$127 billion, an amount which dwarfs the costs of merchants’ annual interchange fees.6 Check

fraud also cost merchants approximately $10 billion (as of 2006).7 Merchants could pay for

check guarantee services—but they would pay between 1.0 and 1.5% of the face value of the

check plus a 14-25 cent-per-check fee (and a monthly customer service fee of up to $15 on top of

that), which is far more than the average interchange fee merchants paid prior to the Final Rule.8

These myriad benefits are why so many merchants voluntarily accept debit cards for the

small price of interchange fees. The debit card market is a classic two-sided market—i.e., “a

For all of these and other reasons noted by commenters and the Board during the


5
rulemaking, the merchants are wrong that electronic debit payment functions simply as an
electronic check. See, e.g., Bank and Credit Union Trade Associations Comment Letter, at 34-39
(Feb. 22, 2011); American Bankers Association Comment Letter, at 5-11 (Feb. 22, 2011); Debit
Card Interchange Fees and Routing, 76 Fed. Reg. 43,394, 43,399-43,401 (July 20, 2011).

6

7
(2008), http://www.kansascityfed.org/Publicat/Econrev/PDF/3q08Sullivan.pdf.

8
American Bankers Association Comment Letter, at 9-10 & n.7.


Richard J. Sullivan, Can Smart Cards Reduce Payments Fraud and Identity Theft?, at 38

See, e.g., MasterCard Worldwide Comment Letter, at 14 & n18 (Feb. 22, 2011);

The 2010 Federal Reserve Payments Study at 9.



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market for the provision of a product whose value is realized only if a member of each of two

distinct and complementary sets of users simultaneously agrees to its use.”9 To succeed, the

debit card market requires the participation of both debit card holders, who must use their cards

to pay for goods and services, and merchants, who must accept the cards as a form of payment.

Both sides benefit from the attraction of the other side to the market, without which the product

would not exist. The costs of the product, however, must be allocated appropriately between the

two sides to best preserve and grow the market.10 Debit card networks charge higher prices to

merchants and lower (or no) prices to individual debit card holders—who are, unsurprisingly, the

more price-sensitive side of the market—in order to attract the latter to the product. In this

manner, the debit card market functions like any other two-sided market—including both

traditional markets such as shopping malls and broadcast television and new markets such as

online social networking platforms—wherein one side of the market (here, merchants) pays more

than the other side (consumers).11

Until the Board’s Final Rule took effect, merchants paid average debit-interchange fees

of only 1.15% per transaction—in 2009, a total of only $16.2 billion in interchange fees on

Robin A. Prager et al., Interchange Fees and Payment Card Networks: Economics,

See generally David S. Evans & Richard Schmalensee, Markets with Two-Sided


9
Industry Developments, and Policy Issues, at 14-15 (2009) (“Prager et al., Interchange Fees”),
http://www.federalreserve.gov/pubs/feds/2009/200923/200923pap.pdf (citing Jean-Charles
Rochet & Jean Tirole, Two-Sided Markets: A Progress Report, 37 RAND J. of Econ. 645
(2006)).

10
Platforms, 1 Issues in Competition Law and Policy 667, 671-672 (2008).

11
system in no way suggests an anticompetitive result. Rather, that unbalanced outcome
maximizes consumer welfare by minimizing costs for consumers. See David S. Evans et al., The
Economic Principles for Establishing Reasonable Regulation of Debit-Card Interchange Fees
that Could Improve Consumer Welfare, at 21-26 (Feb. 22, 2011) (“Evans, et al., Economic
Principles”), http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1769890.


Contrary to the merchants’ assertion, the allocation of prices in the debit card payments



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transactions worth more than $1.4 trillion—an amount commensurate with the benefits they

receive from issuers’ substantial investments in debit card systems.12 Those fees compensated

issuers for the substantial costs they have incurred (and continue to incur) in providing

consumers and merchants the electronic debit payment option. Constantly maintaining and

updating the debit-payments system to enhance functionality, increase security, and provide

innovative debit-payment products requires issuers to expend substantial resources. Issuers also

incur costs of authorizing, clearing, and settling electronic debit transactions—such as the costs

of software, hardware, equipment, labor, network processing fees, and transaction monitoring—

as well as other costs, such as those related to billing and collection, data processing, protection

of consumer data, fraud prevention, card production and replacement, and the costs of providing

customer service for debit transactions. And on top of all those costs, issuers bear the majority

of the costs of fraud losses and credit losses on debit card transactions, which amount to billions

of dollars each year. See 76 Fed. Reg. at 43,397. Issuers created the electronic debit card

payments system, and continue to provide electronic debit payment services, on the reasonable

understanding that they may earn sufficient revenue to cover all these substantial costs while


12
Since the mid-2000s, interchange rates for both PIN and signature debit have remained
roughly constant. See Prager et al., Interchange Fees, supra, at 75 (Figure 3). The merchants’
focus on the increase in the total amount of interchange fees since 2000 is misleading: that
increase is largely attributable to the phenomenal growth in debit card transaction volume and
transaction value over that time, and not (as they suggest) to anticompetitive behavior. Over the
last decade the number of electronic debit transactions grew by more than 400%—to
approximately 38 billion in 2009 from only 8.4 billion in 2000. See Census Bureau, Debit Table
1187, supra; Evans, et al., Economic Principles, supra, at 6. Likewise, the value of electronic
debit transactions rose to $1.4 trillion in 2009 from merely $311 billion in 2000. Id.
Accordingly, it is not surprising that merchants paid more in interchange fees, reflecting the
significantly greater volume and value of debit transactions. Nor is it improper for issuers and
payment card networks to adjust their rates to cover the additional costs of maintaining and
upgrading the electronic debit payment system to handle the explosion in debit card transactions.



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earning a reasonable return on their investment, which provides them with the capital to create

additional innovative electronic payment products that benefit consumers and merchants alike.

II.

THE DURBIN AMENDMENT

The Board’s interpretation of the Durbin Amendment upsets this financial balance. The

Amendment was enacted as part of the Consumer Financial Protection Act of 2010, which in

turn is part of the Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No.

111-203, § 1075, 124 Stat. 1375, 2068-2074 (2010) (“Dodd-Frank Act”). Contrary to the

merchants’ suggestion, there were no committee hearings on the Durbin Amendment, no prior

opportunity for meaningful input from the bank regulatory agencies regarding debit interchange

fee legislation, mere minutes of total debate on the Amendment in the House and the Senate

combined, little to no consideration by Congress of the legislation’s ramifications, and no stand-

alone vote on the legislation in the House of Representatives (the Durbin Amendment having

been hurriedly added to the Dodd-Frank Act during the House-Senate Conference process

shortly after it was introduced on the Senate floor).

The Durbin Amendment sets forth a clear standard for the amount of the debit card

interchange fees that issuers may receive. The statute says that the fee amount shall be

“reasonable and proportional” to the issuer’s costs with respect to a transaction. 15 U.S.C.

§ 1693o-2(a)(2). The statute places this requirement in a new § 920(a)(2) of the Electronic Fund

Transfer Act (“EFTA”):

(2) Reasonable interchange transaction fees.

The amount of any interchange transaction fee that an issuer may
receive or charge with respect to an electronic debit transaction
shall be reasonable and proportional to the cost incurred by the
issuer with respect to the transaction.



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15 U.S.C. § 1693o-2(a)(2). This requirement applies to an “issuer”—i.e., an entity that issues

debit cards—although the statute technically exempts “any issuer that, together with its affiliates,

has assets of less than $10,000,000,000.” Id. § 1693o-2(a)(6)(A).13

The Durbin Amendment directs the Board to promulgate regulations establishing

“standards for assessing whether the amount of any interchange transaction fee” meets the

requirement set forth in § 1693o-2(a)(2)—i.e., whether the fee is “reasonable and proportional to

the cost incurred by the issuer with respect to the transaction.” 15 U.S.C. § 1693o-2(a)(3)(A).

Congress instructed the Board to “consider” certain matters, such as “the incremental cost

incurred by an issuer for the role of the issuer in the authorization, clearance, or settlement of a

particular electronic debit transaction.” Id. § 1693o-2(a)(4)(B)(i). Congress also instructed the

Board not to “consider” “other costs incurred by an issuer which are not specific to a particular

electronic debit transaction.” Id. § 1693o-2(a)(4)(B)(ii). These two instructions, read together,

authorize the Board to consider costs that issuers incur beyond simply “authorization, clearance,

[and] settlement” costs. Indeed, Congress’s ultimate direction to the Board, importantly, is to

establish standards for assessing whether an interchange fee is “reasonable and proportional to,”

broadly, “the cost incurred by the issuer with respect to the transaction.” Id. § 1693o-2(a)(3)(A).


13
It is doubtful, however, that this exemption can be practically implemented. Merchants
have an economic incentive to drive debit transactions to the lowest-cost cards (from regulated
large issuers)—an effect enhanced by the Board’s regulations on transaction routing—and, thus,
smaller issuers will face enduring competitive pressures to lower their interchange fees to the
level of large issuers. Accordingly, the Chairman of the Board, the Chairwoman of the FDIC (at
the time), several Members of Congress, and all major trade associations representing smaller
issuers have all expressed grave concerns about the effectiveness of the exemption in protecting
the debit card businesses of more than 15,000 financial institutions of all sizes. See, e.g., Senate
Banking Committee Hearing Transcript, LexisNexis (CQ Transcriptions database), Feb. 17,
2011, at 16 (statement of Chairman Bernanke); id. at 32 (statement of Chairwoman Bair); Sen.
Carper et al., Comment Letter, at 1-2 (Dec. 9, 2010) (comment letter on behalf of bipartisan
group of 13 Senators); Rep. Owens et al. Comment Letter, at 1 (Feb. 22, 2011) (comment letter
on behalf of seven Members of the House of Representatives); Independent Community Bankers
of America Comment Letter, at 1, 3-4, 10-19 (Feb. 22, 2011).



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Congress also directed the Board to promulgate regulations to prohibit payment card

networks and issuers from restricting—by “contract, requirement, condition, penalty, or

otherwise”—the number of networks on which an electronic debit transaction may be processed

to either a single network or to an affiliated group of networks. 15 U.S.C. § 1693o-2(b)(1)(A).

The Board is also required to issue regulations prohibiting payment card networks and issuers

from “inhibit[ing]”—by “contract, requirement, condition, penalty, or otherwise”—“the ability

of any person who accepts debit cards for payment to direct the routing of electronic debit

transactions for processing” over a particular network. Id. § 1693o-2(b)(1)(B).

III. THE BOARD’S PROPOSED RULE

The Board announced its proposed rule in December 2010. See Debit Card Interchange

Fees and Routing, 75 Fed. Reg. 81,722 (Dec. 28, 2010) (“Proposed Rule”).

A.

Interchange-Fee Proposals

The Proposed Rule offered for comment two alternative debit card interchange fee

restrictions. Under either alternative, debit card interchange fees, which in 2009 averaged 44

cents per transaction, would have been capped at no more than 12 cents—a reduction of more

than 70%, resulting in revenue losses to issuers of approximately $12 billion annually.

Alternative 1 was an issuer-specific rule with both a safe harbor and cap. It would have

allowed an issuer to receive a per-transaction interchange fee up to a 7-cent safe harbor. 75 Fed.

Reg. at 81,738. If an issuer’s allowable costs per transaction exceeded 7 cents, then the rule

would have allowed the issuer the option of demonstrating its costs and receiving a higher per-

transaction interchange fee equal to such allowable costs, but no more than 12 cents. Id. at

81,737-81,738. Per-transaction costs would be determined by taking the issuer’s total

“allowable” costs for the prior year divided by the total number of debit card transactions during

that year. Id. at 81,735. The Board narrowly limited “allowable” costs to only certain costs that



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an issuer incurs for the authorization, clearance, and settlement of debit card transactions. Id. at

81,734. By the Board’s own acknowledgment, its definition of “allowable” costs excluded a

substantial amount of costs that issuers incur in the provision of debit card services, such as

network fees, fraud losses, customer service, and card production and distribution. Id. at 81,734-

81,735. Moreover, even within the limited category of “authorization, clearance, and settlement”

costs, the Board admitted that this alternative was narrowly confined to only those costs that vary

with the number of debit card transactions, up to an issuer’s existing capacity levels (“average

variable cost”). Id. at 81,735.

Alternative 2 was simpler, but remained harsh. It would have set a hard cap on

interchange fees of 12 cents per transaction. 75 Fed. Reg. at 81,738. The cap also would have

operated as a safe harbor, allowing any issuer to charge up to the cap without demonstrating its

allowable costs. Id.

B.

Network-Exclusivity Proposals

The Board also offered two alternatives for implementing the Durbin Amendment’s

exclusivity restrictions. Under Alternative A, the Board would require issuers to enable two

unaffiliated networks for the processing of each electronic debit transaction regardless of the

means by which a transaction may be authorized. 75 Fed. Reg. at 81,749. An issuer accordingly

could have one network for the processing of a transaction by means of PIN authorization and

another (unaffiliated) network for the processing of that transaction by means of signature

authorization. Under Alternative B, the Board would instead require issuers to enable two

unaffiliated networks for each method by which a transaction may be authorized—i.e., two

unaffiliated PIN networks and two unaffiliated signature networks. Id. Under both Alternatives,

the Board did more than simply prohibit exclusivity restrictions. In both instances, the Board



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proposed to affirmatively require the issuer to enable additional unaffiliated networks on debit

cards to process transactions. Id. at 81,756.

IV.

THE COMMENT PERIOD

Speaking with a single voice, every major nationwide bank and credit union trade

association—amici here—submitted a 65-page comment letter expressing their strong opposition

to the Board’s flawed approach. The letter explained that the Board’s price control proposals

exceeded any permissible interpretation of the Durbin Amendment. Amici explained that the

statute requires the Board to establish standards for assessing whether an interchange fee is

reasonable and proportional to issuers’ costs for debit card transactions, and therefore requires

the Board to allow issuers to receive interchange fees sufficient to cover those costs plus a

reasonable rate of return. The comment letter also demonstrated that the Final Rule would have

profound adverse consequences for consumers (particularly low-income Americans), financial

institutions (particularly the nation’s smaller banks and credit unions), and the domestic

payments system. None of these was accounted for in the Board’s Proposed Rule.

In addition to amici’s omnibus comment letter, the Proposed Rule generated a

tremendous volume of comments from financial industry trade associations, banks, credit unions,

and payment-card networks, and many others opposing the Board’s Proposed Rule on the same

or similar grounds. The Acting Comptroller of the Currency even weighed in against the

Board’s Proposed Rule, raising concerns that inflicting such drastic revenue reductions on

financial institutions could create safety and soundness concerns and urging the Board “to



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reconsider its rate-cap based approach” and to allow issuers to recover costs “that are recognized

and indisputably part of conducting a debit card business.”14

V.

THE BOARD’S FINAL RULE

The Board announced its Final Rule last summer. See Debit Card Interchange Fees and

Routing, 76 Fed. Reg. 43,394 (July 20, 2011).

A.

The Interchange-Fee Rule

With respect to debit card interchange fees, the Board adopted a modified version of

Alternative 2 in the Proposed Rule. The Board first repeated the statutory requirement that an

issuer’s interchange fee “shall be reasonable and proportional to the cost incurred by the issuer

with respect to the electronic debit transaction.” 12 C.F.R. § 235.3(a). But it specified that “[a]n

issuer complies with the requirements of [§ 235.3(a)] only if each interchange transaction fee

received or charged by the issuer for an electronic debit transaction is no more than the sum of

… 21 cents” plus an ad valorem component of “5 basis points” of the transaction’s value. Id.

§ 235.3(b). The Board set the 21-cent amount based only on “certain costs incurred” by issuers

“to effect an electronic debt transaction.” 76 Fed. Reg. at 43,404. The Board did not include all

costs that issuers incur in effecting debit card transactions. For example, it excluded the costs of

customer inquiries and customer service and of debit card production and distribution. Id. The

Board’s ad valorem component allowed for issuers to charge a percentage of the value of the

transaction, which the Board viewed as permitting issuers to cover the costs of fraud losses

(which are borne primarily by issuers). Id.

In a separate rulemaking published in The Federal Register the same day, the Board also

promulgated an interim final rule, 12 C.F.R. § 235.4(a), authorizing a one-cent adjustment for

14
of Governors of the Federal Reserve System, at 1, 3 (Mar. 4, 2011), http://www.federalreserve
.gov/SECRS/2011/March/20110308/R-1404/R-1404_030711_69110_478769283129_1.pdf.

Letter from Acting Comptroller of the Currency, John Walsh, to Jennifer Johnson, Board



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eligible issuers for fraud-prevention costs. See Debit Card Interchange Fees and Routing, 76

Fed. Reg. 43,478 (July 20, 2011). Accordingly, an issuer that complies with the fraud-

prevention standards specified in the Durbin Amendment, 15 U.S.C. § 1693o-2(a)(5)(A), and in

the Board’s regulation, 12 C.F.R. § 235.4(b), (c), would be eligible to receive interchange fees

for each transaction of up to 22 cents plus 5 basis points of the transaction’s value.

B.

The Network-Exclusivity Rule

With regard to the Durbin Amendment’s exclusivity restrictions, the Board adopted

Alternative A. The regulation states that payment card networks and issuers “shall not … by

contract, requirement, condition, penalty, or otherwise, restrict the number of payment card

networks on which an electronic debit transaction may be processed to less than two unaffiliated

networks.” 12 C.F.R. § 235.7(a)(1). The regulation further states that an issuer “satisfies the

requirements of [§ 235.7(a)(1)] only if the issuer allows an electronic debit transaction to be

processed on at least two unaffiliated … networks.” Id. § 235.7(a)(2). The Board therefore

continued to read the statute’s prohibitions on network-exclusivity restrictions as an affirmative

requirement that issuers enable multiple unaffiliated networks to process transactions on their

cards. The Board did not require that there be multiple unaffiliated payment card networks for

both PIN authorization and signature authorization (or for any other authorization methods), but

instead required an issuer to have two unaffiliated networks for an electronic debit transaction,

regardless of the particular authorization method (e.g., PIN or signature) used at the point of sale.

See id. § 235.7(a)(1).

SUMMARY OF ARGUMENT

Amici are not here to defend the Final Rule. That rule drastically reduces the debit-

interchange fees that issuers may receive, resulting in anticipated annual revenue losses to

amici’s member institutions of $6-8 billion. The merchants bring their lawsuit in pursuit of even



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deeper cuts in issuers’ interchange-fee revenues, seeking to reap the benefits of debit card

transactions and innovation in the electronic-payments system practically for free—an

unwarranted, unfair, and unprecedented windfall. The Board’s Final Rule is already flawed

precisely because it imposes below-cost caps on interchange fees and fails to provide for

recovery of a reasonable return. In these respects, the Final Rule contravenes the Durbin

Amendment’s requirement that the interchange fee that an issuer may receive “shall” be

“reasonable and proportional to the cost incurred by the issuer with respect to the transaction.”

15 U.S.C. § 1693o-2(a)(2). The merchants’ position would exacerbate the Board’s error,

depriving issuers of further revenues required to cover their costs and earn a reasonable return.

Far from improving consumer welfare, the Final Rule leads to reduced financial services and

higher fees for millions of Americans. It also threatens to reduce lending and investment by

banks and credit unions during an already fragile economic recovery. The Final Rule will not

benefit merchants’ customers, but rather will only serve to line the pockets of merchants.

The network-exclusivity rule fares no better. The merchants contend that the Board

should have required issuers to enable more networks to process each electronic debit

transaction. But the Durbin Amendment’s text need not be read to require issuers to enable any

networks. The statute sets forth a negative prohibition—it precludes issuers and networks from

agreeing to limit processing to only one network. The Board’s Final Rule, in contrast, imposes

an affirmative obligation, requiring issuers to negotiate and enter into arrangements with

multiple payment card networks for processing of electronic debit transactions. That

requirement is not the best reading of the statute. And, even if the Durbin Amendment were to

require enablement, there is no plausible way to read the statute to permit original Alternative B

from the Board’s Proposed Rule, which would have required enablement of many more networks



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(at least four, and potentially more) for each electronic debit transaction. Again, the merchants’

position would exacerbate the Board’s error.

ARGUMENT

I.

THE DURBIN AMENDMENT REQUIRES THE BOARD TO PERMIT ISSUERS TO RECEIVE
INTERCHANGE FEES THAT COVER THE COSTS OF EFFECTING ELECTRONIC DEBIT
CARD TRANSACTIONS PLUS A REASONABLE RETURN

The Durbin Amendment does not authorize the Board to issue standards that preclude an

issuer from receiving an interchange fee sufficient to cover its debit card transaction costs plus a

reasonable rate of return, much less to mandate a fee amount that is below issuers’ actual costs.

The Board’s deliberate exclusion of a reasonable return from the amount issuers may receive

through interchange fees also raises constitutional concerns under the Takings and Due Process

Clauses of the Fifth Amendment to the Constitution of the United States.

A.

The Durbin Amendment’s Text Requires That Interchange Fees Include A
Reasonable Return For Issuers

The Board’s Final Rule contravenes the Durbin Amendment because, by its very design,

the Board’s Rule fixed its fee cap to be equal to certain costs that the Board deemed allowable,

but to exclude a reasonable return above those costs. The Durbin Amendment imposes a single

requirement on issuers regarding the “amount of any interchange transaction fee” that they may

receive: The amount of the fee “shall be reasonable and proportional to the cost incurred by the

issuer with respect to the transaction.” 15 U.S.C. § 1693o-2(a)(2). The Amendment then

charges the Board with establishing “standards for assessing” whether a fee satisfies this

requirement. Id. § 1693o-2(a)(3)(A).

Had Congress intended to require the Board to restrict interchange fees to cost alone, it

would have done so explicitly and directly. Yet Congress did not use terms like “limited to” or

“equal to” that it has typically employed to confine the permissible level of fees, rates, or prices.



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For example, elsewhere in the Dodd-Frank Act, Congress directed the Board to collect from

certain companies “a total amount of assessments, fees, or other charges . . . that is equal to the

total expenses the Board estimates are necessary or appropriate to carry out the supervisory and

regulatory responsibilities of the Board with respect to such companies.” 12 U.S.C. § 248(s)(1),

124 Stat. at 1527 (emphasis added).15 In more traditional rate-making contexts, Congress has

been direct and explicit when it instructs an agency to set a fee, rate, or price equivalent or

limited to only certain costs. See, e.g., 7 U.S.C. § 940f(c)(2) (“The amount of the fee paid shall

be equal to the modification cost[.]” (emphasis added)); 42 U.S.C. § 10222(a)(3) (prescribing fee

to be “in an amount equivalent to an average charge of 1.0 mil per kilowatt-hour for electricity

generated by such spent nuclear fuel, or such solidified high-level waste derived therefrom”

(emphasis added)).

These examples contrast starkly with the “reasonable and proportional” phrasing of the

Durbin Amendment. Here, Congress provided for issuers to receive an “amount” for interchange

fees that is both “reasonable” and “proportional to” the costs incurred in relation to electronic

debit transactions. The phrase “reasonable and proportional” in relation to costs incurred by an

issuer requires allowance of a fee that covers those costs (as described in 15 U.S.C. § 1693o-

2(a)(2) and (a)(3)(A)) plus a reasonable and proportional rate of return above those costs.

That issuers are entitled to receive a reasonable rate of return is clear from both the

ordinary meaning of the statutory text and the well-known interpretation of similar textual

formulations used in federal rate-making statutes. The ordinary meaning of a “reasonable” fee is

one that is “moderate” or “that allows a fair profit.” Webster’s Third New International


15
See also 5 U.S.C. § 552(a)(4)(A)(i), (ii)(I) (directing agencies to “promulgate reg