Fed To Retailers: No, We're Not Cutting Debit Interchange Until The Supreme Court Says We Have To

So much for billions in debit-interchange refunds for retailers—at least for the next few years. Last Wednesday (Aug. 21), lawyers for the Federal Reserve told a federal judge that they had appealed his ruling striking down the Fed's 21-cent debit-fee cap, and that the Fed has no plans to recalculate the fee during the appeal.

The Fed's appeal was actually much quicker than it technically had to be—just 21 days after U.S. District Judge Richard Leon's ruling instead of the 60 days the Fed had to decide whether to appeal. In practical terms, though, the move means banks will probably get several more years to keep charging retailers higher debit interchange than may be legally allowed—and pocketing an extra $3.5 billion per year.

The Fed's move sounds pointless. Part of the reason Judge Leon's decision "sent shock waves through the merchant, banking, and credit/debit card industry," as StorefrontBacktalk Legal Columnist Mark Rasch put it, is that most legal analysts said the judge did a good job of reading the law—in this case, the Durbin amendment to the Dodd-Frank financial reform law. Even the analysts who hated the decision mostly said it was a bad law, but the judge read what it said correctly.

The Fed's lawyers probably believe that too. (Just kidding—an adverse ruling must be wrong.) But the judge being wrong isn't the only reason to file an appeal.

Then why else? Reason number one: Even if there's only a slim chance of winning this appeal, the Fed isn't likely to end up worse off—especially since there's no chance of getting Judge Leon to relent. That's clear from his pointed comments about the Fed's rule-making process: The words "utterly indefensible" pretty much define that, in Leon's eyes.

Reason number two: Appeals take time, and barring an indication of irreparable injury, it's usually status quo until the appeals are used up. That means the 21-cent cap on interchange for debit-card transactions will remain in place until the appeals court rules. That will likely be a three-judge panel, which means the loser will appeal to the full court of appeals, after which there's always appealing to the U.S. Supreme Court—which, given the amount of money involved, is almost a certainty.

Reason number three: Maybe they'll get a new trial judge. Even if the Fed loses all appeals and ends up back in the U.S. District Court in D.C., Judge Leon might be gone. He might have been promoted to the appeals court while the case was at the Supreme Court. He might have retired. For whatever reason, the case might end up in front of a friendlier judge.

Of course, it might end up back in front of Leon. But by then, card-issuing banks will have continued to collect the extra debit interchange. How much? When the Fed first settled on a 21-cent cap instead of the 12-cent cap it originally calculated, ratings agency Moody's calculated the higher cap would bring banks an extra $3.5 billion a year.

And while Leon is still looking at the question of whether merchants should get that money back, there's a real question of whether the judge in a lawsuit by merchants against the Fed could order theoretically unrelated parties—the banks—to refund that interchange money. That might require a new set of lawsuits that could only be filed once the whole was-the-Fed-right? question is settled, and those lawsuits will have their own appeals processes to wind through.

Of course, the Fed could have simply created an interim debit-fee cap rule anyway, one that would temporarily have reduced the cap until the case was finally resolved. Why didn't it? Fed lawyer Scott Alvarez told the judge it would be unreasonable to ask the Fed to craft new fee limits at the same time that the agency was asking an appeals court to approve its initial cap. That's the legal argument.

There was also a practical argument: Both retailers and banks would have to change their systems to comply with an interim rule, even though an appeals court might reverse it. "Switching back and forth is something that imposes costs on everybody," a banking industry lawyer said.

Well, sure. But both retailers and banks have already changed their systems to comply with the Fed rule that capped the debit interchange rate at 21 cents in 2011. How to change that number is probably pretty fresh in everyone's mind. Somehow, the idea that this is about saving IT people some work is a little less than convincing.

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