WASHINGTON–NCUA’s issuance of an Interim Final Rule to clarify federal credit unions’ (FCUs) power to charge non-interest charges and fees, including interchange fees, under the Federal Credit Union Act provides not just relief to federally chartered CUs, but it also becomes another matter for the U.S. District Court for the Northern District of Illinois to consider in the lawsuit involving that state’s Interchange Fee Prohibition Act (IFPA).
As the CU Daily has been reporting, America’s Credit Unions and the Illinois Credit Union League joined with the American Bankers Association and Illinois Bankers Association in a lawsuit over the law, arguing it is preempted by federal banking laws and would require extensive and costly changes to payment systems.
The case centers on Illinois’ first-in-the-nation law barring interchange fees on the tax and gratuity portions of debit and credit card transactions.
The OCC recently issued a final rule saying there is a federal preemption for federal banks. That, in turn, led a court to grant a permanent injunction preventing Illinois from enforcing the IFPA’s interchange fee prohibition against certain banks, federal savings associations, and payment networks.
NCUA has now issued its similar rule for federal credit unions.
Co-Plaintiffs Reviewing Next Steps
Ann Petros, VP-policy engagement and credit union operations at America’s Credit Unions, who called the NCUA’s interim final rule a “positive development,” said the co-plaintiffs are now in the “process of determining next steps in the litigation. We are planning to appeal to the 7th Circuit, but with this rule now released from the NCUA we will discuss with our attorneys the best next step to alert the courts to this new development.”
Amicus Brief Filed in Separate Interchange Case
Separately, America’s Credit Unions and the Defense CU Council joined with a coalition of other banking groups in filing an amicus brief with the U.S. Court of Appeals for the Sixth Circuit in the case Linney’s Pizza v. Federal Reserve in urging the court to uphold the Federal Reserve Board’s Regulation II, arguing that overturning the rule would disrupt the debit card payments system and undermine investments in payment security, fraud prevention and consumer services.
The coalition — which also included the American Bankers Association, Association of Military Banks of America, Consumer Bankers Association, Independent Community Bankers of America and the Mid-Size Bank Coalition of America — filed the brief in response to an appeal challenging the Federal Reserve’s interpretation of the Durbin Amendment and its implementation through Regulation II, which governs debit card interchange fees.
According to the coalition, Congress directed the Federal Reserve to establish regulations ensuring debit card interchange fees remain “reasonable and proportional” to the costs incurred by financial institutions in authorizing, clearing, settling and securing debit card transactions. The groups noted that Regulation II, issued in 2011, was upheld by the U.S. Court of Appeals for the D.C. Circuit in 2014 after a similar legal challenge.
The coalition argued in its brief that financial institutions have relied on that interpretation for more than a decade while continuing to invest heavily in payment processing infrastructure, network connectivity, fraud mitigation systems and transaction authorization capabilities that support the nation’s debit card network.
The filing contends the Federal Reserve improperly included certain costs when calculating the interchange fee cap under Regulation II. The coalition said a federal district court in Kentucky correctly rejected those arguments earlier this year and upheld the regulation.
Cap Would Not Reflect True Costs
According to the brief, adopting the merchants’ interpretation would require the Federal Reserve to impose a significantly lower interchange fee cap that does not reflect the actual costs associated with processing debit card transactions. The groups argued such a move would force many issuers to process transactions at a loss, reduce investment in payment innovation and security, and ultimately harm consumers.
The coalition further argued that merchants have not historically passed interchange-related savings on to consumers, despite prior reductions in interchange revenue. Instead, additional cuts could result in higher account fees, reduced access to debit card products, fewer banking services and diminished investment in cybersecurity and fraud prevention, the groups said.
The brief also challenged claims that financial institutions earn excessive profits from debit card transactions. The coalition cited Federal Reserve data indicating that only 77% of issuers currently recover their allowable base component costs under Regulation II and noted that the fee cap does not account for all costs associated with maintaining debit card programs.
The groups warned that community banks and credit unions could face particularly significant consequences. While many smaller institutions are exempt from Regulation II’s interchange fee cap, the coalition said market pressures have already reduced interchange revenue across the industry, and further reductions would disproportionately affect institutions that rely on such revenue to provide low-cost financial services and member benefits.
‘The Stakes’
“The stakes extend far beyond interchange policy,” Jason Stverak, chief advocacy officer witih the Defense Council, said in a statement. “At issue is the ability of credit unions to continue providing secure payment services, investing in emerging threats and technologies, and delivering value to the members and communities they serve.”
The coalition told the court that Regulation II has been in place since 2011 and has repeatedly survived legal challenges, creating significant reliance interests throughout the payments ecosystem. The groups urged the Sixth Circuit to affirm the lower court’s ruling and preserve what they described as a stable and balanced regulatory framework for consumers, merchants and financial institutions.
As America’s Credit Unions has noted, and as the CU Daily has reported, the case is closely related to Corner Post v. Federal Reserve, another challenge to interchange fee caps. America’s Credit Unions filed a brief in Corner Post in January, that a district court’s decision would force the Federal Reserve to impose interchange fee caps far below the actual costs incurred by debit card issuers.
