The Durbin Amendment to Dodd Frank financial reform legislation slipped in something completely unrelated to preventing future financial crises – it was a giveaway to retail merchants: capping interchange fees for debit card transactions.

Banks would no longer be able to make money on debit cards.

• That’s why we no longer have broad-based debit card rewards. Those really just exist for debit products that are exempt from the rule. Whereas it used to be common to earn 1 mile per dollar spent on debit (or at least 1 mile per $2 spent), it’s no longer profitable for banks to incentivize these transactions and so they don’t.

• Banks used to make money on debit cards, so they wanted people to open checking accounts. After their ability to make money on debit transactions was eliminated, free checking for many customers was no longer profitable. We started to see minimum balance and payroll direct deposit requirements to waive checking fees. Many customers were pushed out of traditional banking and over to check cashing stores.

Senator Dick Durbin is trying this again with credit card legislation. In the meantime, though, the Federal Reserve – whose rule capped debit fees at 21 cents per transaction in most cases – has proposed to reduce the fee even further to 14.4 cents citing lower processing costs.

However the Supreme Court heard a challenge to the Durbin Amendment. Specifically, they’re expected to rule on whether a new challenge to the Durbin Amendment is too late.

• Typically new regulations have to be challenged within six years
  
• That’s a different approach than most time-barring rules
  
• Normally the clock starts ticking once harm becomes known

These rules went into effect in 2011. A retailer that started its business in 2018 says they should be able to challenge the rules, but they did not exist once the normal six year limit had lapsed. They claim that the specific limits in the final rule were arbitrary and not well-backed. I won’t express a view on that claim, not having studied it closely enough. For now, though, the question is whether that challenge may move forward.

The store, called Corner Post and located in Watford City, appealed after lower courts threw out its lawsuit on the basis of missing the six-year statue of limitations that generally applies to such litigation. Corner Post argued it should not be bound by the statute of limitations because it opened for business in 2018, meaning its legal injury arose only after the deadline had passed.

If allowed to proceed, that opens the floodgates to challenge federal rules. If they’re illegal, shouldn’t they be challenged? Critics argue that it’s more important to settle law.

During oral argument, Justices Kagan and Katanji-Brown expressed skepticism of the suit, while Justice Gorsuch (“The normal rule – and I think you’d have to concede it – is that the plaintiff’s injury is the moment of accrual”) and Chief Justice Roberts (“You’re saying, ‘Well, that’s just too bad, you can’t do anything about it because other people had six years to do something about it”) appeared supportive.

If the lawsuit is permitted to go forward, and then if if prevails, it would have huge implications for the potential return of debit card rewards.

(HT: Paul H)