Appeals court to closely examine lower court interchange ruling

U.S. Court of Appeals for the District of Columbia Circuit Judges David Tatel, Harry Edwards, and Stephen Williams asked questions at oral arguments, on January 17, that raised questions about whether they will fall in line with a lower court ruling that sought to overturn the Federal Reserve's debit interchange fee cap regulations.

The case is known as NACS, et al. v. Board of Governors of the Federal Reserve System.

"We are very encouraged by today's hearing, as it shows that the court will be taking a hard look at U.S. District Court Judge Richard Leon's decision striking down the Federal Reserve's interchange rules. We are optimistic that this will result in more costs being taken into account in the setting of interchange fees than Judge Leon's decision would allow," Credit Union National Association (CUNA) General Counsel Eric Richard said.

Last year, Leon put a stay on his decision, pending the outcome of the case.

They heard from the Federal Reserve, a coalition of financial services groups, including CUNA, and merchants.

The merchants have argued that the Fed overstepped its bounds, allowed too many costs to be considered, and set too high of a cap. The three judges seemed to dismiss out of hand the position that merchants took in district court earlier this year. "They seemed to recognize that additional costs can be properly considered under the statute," Richard also noted.

Merchants brought the case against the Fed in 2012, alleging that the Fed made errors in implementing a final rule that caps debit interchange fees for issuers with assets of $10 billion or more at 21 cents, and allows certain other charges to cover fraud losses and fraud prevention.

CUNA and the coalition in the past have argued that the Fed cap is too low and does not allow debit card issuers to cover their costs and a reasonable rate of return on their investments. The coalition has underscored that consumers have not seen any pricing benefits for products and services promised by the merchants when they were fighting for a government-set cap on what card issuers may charge for their services.

Lawyers that spoke on behalf of financial services coalition articulately presented credit union concerns, Richard said. However, he added, nothing is certain until the court actually issues its opinion. "Even after that, depending on exactly what the court says, there may still be much work to be done," he added.

The appeals court will rule on the case before its term ends in August, and a decision could come as soon as this spring.

"The stakes are very high, particularly at a time when many are relying on interchange revenues to cover the costs associated with data breaches at big box retailers."