Epstein on Debit Cards and the Durbin Amendment
One of the great financial innovations of the 1990s was the now ubiquitous debit card. But its salad days may well be coming to an end. Why? Because of two events. First, the Federal Reserve in 2011 set rates for debit card transactions at $0.21 per transaction. Second, this past week, Judge Richard Leon of the Southern District of New York set aside two of the Fed’s regulations in NACS v. Federal Reserve.
In the case, the Fed was sued by a group of retailers who claimed that its rates were too high. Judge Leon ordered the Fed to order new rates, which will approach $0.03-0.06 per transaction. Many observers fear that Judge Leon’s decision will create “turmoil” in the debit card industry. The full story bears some telling.
Back in 2011, the Fed adopted its regulation pursuant to the authority conferred on it by the so-called 2010 Durbin Amendment (which I have written about here and here). The amendment was a last minute add-on to the comprehensive Dodd-Frank legislation. Before its passage, debit card fees were determined by prices set by the voluntary market that had five key players. Sitting in the middle were the network platforms, chiefly Visa and MasterCard. On the one side of that platform were the retailers who operate through merchant banks. On the other side were the issuing banks whose customers use debit cards.