Court sides with retailers, goes against Fed rule on debit card fees


A judge overturned a Federal Reserve rule capping debit card fees that banks collect from merchants. The retailing industry, which had sued to overturn the rule, hailed the judge’s decision. (David Paul Morris/Bloomberg)
July 31, 2013

A U.S. district court on Wednesday overturned a Federal Reserve rule capping the debit card fees that banks collect from merchants.

The judge ruled that the Federal Reserve improperly set the caps too high after an extensive lobbying campaign by the banking industry. Under the rule, banks can charge retailers as much as 21 cents a transaction.

The court ruling was a victory for the many retailers that had complained that the cap on the interchange fee, or “swipe fee,” is too high. Retailers have argued that consumers will benefit from a lower fee because these costs are sometimes passed on in the form of higher prices.

The banking industry immediately expressed disappointment with the decision and urged the Federal Reserve to appeal. The industry has said that merchants are unlikely to pass on this “windfall” to consumers and instead will increase their profit margins.

In a strongly worded decision, U.S. District Judge Richard Leon said that the Federal Reserve had not properly interpreted the 2010 financial overhaul law, which directed it to revamp the way banks charge merchants for accepting debit cards. The Fed rule “runs completely afoul of the text, design and purpose” of an amendment authored by Sen. Richard J. Durbin (D-Ill.) to limit these fees to the actual cost of processing debit card transactions.

Even though the Fed had initially proposed a cap of about 12 cents, the final rule was expanded to cover more items, including the cost of equipment and fraud-prevention technology. That was improper, the court ruled.

The Fed’s decision “to bend to the lobbying by the big banks and card giants cost small business and consumers tens of billions of dollars and did not do enough to rein in the anti-competitive, anti-consumer practices of Visa and MasterCard,” Durbin said in a statement.

A spokesman for the Federal Reserve did not return a call for comment.

The retailing industry, which had sued to overturn the rule, hailed the judge’s decision.

The decision “will give relief to merchants across the country and their customers, putting a stop to unconscionable price gouging that is completely at odds with the law,” the Merchants Payments Coalition, a group of merchants and retailers, said in a statement. Several merchants, including the National Restaurant Association, sued to overturn the rule.

The court decision could result in debit fees being cut by more than 50 percent, Guggenheim Partners said in a note to investors. Fees probably will revert to the 7 cents to 12 cents per transaction that the Fed had initially proposed, the note said.

Fees will not be lowered, however, until the Fed adopts new standards. In the decision, Leon said it should take “months, not years” to develop new rules. But Guggenheim Partners predicted that the current fees will remain in place through 2014 or even longer, because the Fed may appeal the ruling.

The Fed should “pursue all legal means to mitigate the harm this decision will cause,” Frank Keating, president of the American Bankers Association, said in a statement. The “court’s interpretation will have disastrous consequences for the institutions affected and the communities they serve. This result must be reversed.”

Analysts expect that the decision will affect the biggest banks most, but small debit card issuers warned of the decision’s “potentially devastating impact” for credit unions. The decision “will challenge credit unions to continue their debit card programs without incurring drastic cuts in revenue, or imposing additional fees on their members,” Eric Richard, general counsel of Credit Union National Association, said in a statement.

A good deal of money is at stake for both sides. The Federal Reserve has said that interchange fees totaled nearly $17 billion in 2009. Banks have said they count on the fees to offset the cost of offering checking accounts and popular customer perks, such as debit card rewards programs.

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