Coming off a record-setting Black Friday that Washington area merchants hope is a promising sign of economic recovery, the retail industry is currently in the midst of the most important — and most competitive — shopping season of the year. Whether they are discounters trying to offer the lowest price, luxury shops one-upping each other on service, or the mid-range stores in between, retailers are competing intensely to offer the type of value most important to their niche of the consumer marketplace.
Merchants are fueling part of the cost of these discounts and other benefits with the roughly $7 billion a year in savings they are beginning to see from a new Federal Reserve cap on debit card swipe fees that took effect in October. Unfortunately, that savings is only about half what it would have been before the banking and card industries persuaded the Fed to set the cap nearly twice as high as what was first proposed back in 2010. Had the Fed not yielded to a massive, multimillion-dollar lobbying campaign, retailers and their customers would have seen an estimated $14 billion a year in savings.
The Dodd-Frank Wall Street Reform and Consumer Protection Act was very specific in what the Fed was allowed to consider when determining “reasonable” swipe fees “proportional” to banks’ actual costs in processing debit transactions. The law allowed the Fed to include the incremental costs of acquiring, clearing and settling each transaction, and specifically prohibited any other expenses from being used to inflate those costs.
The Fed came close to that mandate in December 2010, when it calculated banks’ actual cost at an average of 4 cents and proposed a cap of no more than 12 cents. But by the time the regulations were finalized this July, the cap had increased to a complicated formula of 21 cents plus 0.05 percent of the transaction and an extra penny for fraud protection — a total of more than five times banks’ actual costs.
That failure to follow the clear requirements of the Dodd-Frank law is why the National Retail Federation, the Food Marketing Institute and the National Association of Convenience Stores joined together last month to sue the Fed in U.S. District Court. The lawsuit contends that the Fed violated the requirements of the law and asks that they be ordered to go back and recalculate within the parameters of the law.
The Fed was required to come up with swipe fees that were reasonable and proportional but what we got was neither. Instead, Fed officials allowed themselves to be influenced by the very banks they are supposed to regulate. We want them to go back and follow the law this time.
In passing swipe fee reform, Congress recognized that these fees have driven up prices for consumers dramatically — more than $400 a year when credit and debit swipe fees are included — and intended to achieve significant savings retailers could share with consumers during these economically challenging times.
Lowering retail prices is a win-win that not only gives consumers more for their hard-earned dollars but also creates demand that boosts employment. It’s time for the Fed to follow the will of Congress and put the good of the nation’s economy ahead of the greed of Wall Street bankers.
Mallory Duncan is senior vice president and general counsel at the National Retail Federation in Washington.
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