The Federal Reserve Board says it followed a proper system for establishing debit interchange caps and fully abided by the Durbin Amendment’s requirement for merchants to have two unaffiliated networks to choose from for routing debit transactions.

The board filed its reply to allegations from merchants to the U.S. Court of Appeals Dec. 4, part of a process initiated when Judge Richard Leon called out the board in July for setting a new debit interchange cap too high for merchants, thus giving banks targeted by the law an easier road in complying with the Durbin amendment of the Dodd-Frank Act.

The argument documents prepare Judge Leon and lawyers for oral arguments scheduled for court on Jan. 17, 2014.

In his July ruling, Leon agreed with plaintiffs in the case — including the National Retail Federation, the National Association of Convenience Stores and the Food Marketing Institute — that 24 cents was too high. Leon's ruling said the Fed, which had originally proposed a 12-cent limit, ignored congressional intent in setting the cap.

In doing so, Leon’s ruling also questioned whether the board followed the spirit of the law in establishing only two networks for debit routing, suggesting that more might be appropriate. The Fed says its actions have eliminated the network exclusivity Congress had feared in the current payments system.

The merchants fail to identify a single network or issuer restriction that the rule allows in violation of the statute, the Fed states in its appeal. The merchants also fail to demonstrate the board’s interpretation of the fee standard provisions “are beyond the board’s interpretive authority provided by Congress,” the court document states.

The board announced in August that it intended to appeal Leon’s ruling in favor of the merchants.

The board confirms that the network exclusivity rule “speaks only in terms of issuer and payment card network restrictions” but does not address restrictions imposed by merchants or others. The Fed says its purpose was to end the so-called “network exclusivity” agreements and the issuer- or network-imposed routing preferences that had previously pervaded the marketplace.

The judge’s ruling came at a bad time for payments industry professionals already attempting to tackle the technology issues behind the debit routing issue in the case of EMV smart card transactions.

The U.S. represents the only country with multiple PIN debit networks, creating a complicated task for coding EMV smart cards previously used only in countries with one major debit network.

Subscribe Now

Authoritative analysis and perspective for every segment of the payments industry

14-Day Free Trial

Authoritative analysis and perspective for every segment of the industry