Fed to face judge over swipe fees

August 20, 2013

The Federal Reserve on Wednesday is expected to outline plans for its cap on fees that banks collect each time a debit card is swiped — an issue that has become a flashpoint in the debate over the Fed’s regulatory powers.

The central bank was ordered to rewrite its rules governing interchange, or “swipe,” fees after a U.S. District Court judge, saying they ran “completely afoul” of the Fed’s mandate, overturned them last month. Judge Richard Leon requested that the Fed craft temporary regulations to take their place.

The central bank’s “interpretation is utterly indefensible,” he wrote in the opinion.

The Fed is slated on Wednesday to detail the process and timeline for issuing interim guidelines. However, the Fed has until the end of September to decide whether to appeal the judge’s decision. It could even refuse to write temporary rules, setting the stage for a more protracted legal battle.

The path it chooses likely will be parsed for indications of how it will approach other regulations it has been charged with crafting in the wake of the financial crisis. That has helped turn the courtroom into another front in the battle over the extent of the Fed’s powers.

“We urge the Federal Reserve to pursue all legal means to mitigate the harm this decision will cause to consumers, community banks and all institutions that provide financial services to local communities,” Frank Keating, head of the American Bankers Association, a trade group, said in a statement after the judge’s decision. “This result must be reversed.”

Swipe fees are paid to banks by merchants whenever customers use debit cards. The two groups have long haggled over the size of the fees and took their battle to Capitol Hill three years ago as lawmakers were debating a sweeping overhaul to the nation’s financial system. The resulting legislation included a provision that the Fed write new rules limiting the swipe fees banks can charge.

The move was considered a major blow to banks, which relied on the fees for billions of dollars in annual revenue. The Fed last year capped the fees at 21 cents plus a small percentage of the transaction amount. Last year, the average size was between 23 and 25 cents per debit card transaction.

That cap was higher than banks had anticipated, and they welcomed the regulation even though interchange revenue dropped by 40 percent to $15.4 billion in 2012.

Retailers, however, were aghast. Convenience stores argued that the ceiling was higher than the fees they paid previously, wiping out any profit when customers use debit cards for small transactions. A coalition of merchants filed suit on the grounds that the Fed had overstepped the boundaries outlined in the mandate from Congress, and the judge upheld their argument.

“We were extraordinarily disappointed by the Fed’s final cap,” said Mallory Duncan, general counsel for the National Retail Federation, a party in the suit. “The Fed is not often sued, but then they generally adhere to public law and don’t completely bend to the will of the banks.”

The Fed, through a spokesman, declined to comment for this article.

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