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Card Fees: Fed Sent Back to Drawing Board (Update 2)

Updated from 2:37 p.m. ET with market close information and comment from Pepper Hamilton LLP partner Frank Mayer.

NEW YORK ( TheStreet) -- More than two years have passed since the Federal Reserve issued final rules to implement the Durbin Amendment, but the battle isn't over.

On Wednesday, U.S. district court judge Richard J. Leon in Washington ruled that the Federal Reserve had "clearly disregarded Congress's statutory intent by inappropriately inflating all debit card transaction fees by billions of dollars and failing to provide merchants with multiple unaffiliated networks for each debit transaction."

The Durbin Amendment -- named after Senator Richard Durbin (D., Ill.) -- is part of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which President Obama signed into law in July 2010. The Durbin Amendment placed limits on the interchange fees paid by merchants to banks to process debit card purchase transactions. The amendment also gave retailers more freedom to choose which network to use to route debit card payments. Durbin covered banks with total assets exceeding $10 billion.

The idea of Durbin was that by limiting the interchange fees and allowing merchants choice over which network would be used to process the transactions, the savings to merchants could be passed to consumers through lower prices.

The Federal Reserve in December 2010 estimated that the average debit card interchange fee paid during 2009 was 44 cents, and initially proposed a cap on interchange fees at 12 cents. After the usual comment period, the Fed in June 2011 issued its final ruling, for an interchange fee cap of 21 cents, plus an additional "5 basis points multiplied by the value of the transaction."

That last bit removed the possibility of a very expensive transaction having the same interchange fee as the purchase of a pack of gum.

While many investors and bankers breathed a sigh of relief that the Federal Reserve raised the interchange fee cap considerably from its initial proposal, large banks took it on the chin when the rules were implemented during the fourth quarter of 2011.

Bank of America (BAC - Get Report) said in January 2012 that "the implementation of new interchange fee rules in the fourth quarter of 2011 as a result of the Durbin Amendment... reduced revenue by $430 million."

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