In a victory for the banking industry, a U.S. appeals court on Friday struck down a district court decision that ordered the Federal Reserve to rewrite its rules governing fees that banks collect each time a debit card is swiped.
The ruling reverses a July decision by U.S. District Court Judge Richard Leon, who said that the central bank set the cap too high under pressure from the banking lobby. The Fed gave banks the thumbs-up to charge retailers as much as 21 cents a transaction, about half the previous 44-cent charge per swipe.
Consumers will not feel any immediate impact from the ruling since banks and merchants operated under the Fed’s cap throughout the legal battle.
The appeals court decision is a blow to merchants who have fought for nearly four years to limit the interchange fee, or “swipe fee.” Merchants have argued that consumers are the ultimate victims of these fees because the costs are usually passed on to them in the form of higher prices.
“The Fed ignored congressional intent and worked to shield debit card companies and big banks. A self-described victory for the banks usually results in higher costs for consumers,” said Mallory Duncan, general counsel for the National Retail Federation.
The banking industry applauded the appeals court’s decision, which will eventually funnel billions of dollars back into their coffers. Before the cap, interchange fees totaled nearly $17 billion in 2009, according to the Fed. Banks have argued that they need the fees to offset the cost of providing checking accounts and other services.
“Reasonable minds have prevailed,” said Richard Hunt, president and chief executive of the Consumer Bankers Association, a trade group. “Any further changes to the currently allowed interchange rates would only pile on the negative consequences for consumers. Consumers must come first in this process, not the bottom line of retailers.”
The appellate court said the Fed reasonably interpreted the 2010 Dodd-Frank financial overhaul law, which directed it to revise the way banks charge merchants for accepting debit cards. It determined that the Fed did its best to overcome the “ambiguity” of an amendment authored by Sen. Richard Durbin (D-Ill.) to limit swipe fees to the actual cost of processing debit card transactions.
An outspoken critic of the Fed’s interpretation, Durbin called the appellate court ruling “a giveaway to the nation’s most powerful banks and a blow to consumers and small businesses across America.”
In a statement, Durbin railed against the court for upholding a rule that allows “Visa and MasterCard to dramatically increase debit swipe fees on many small businesses, contrary to Congress’s clear language and intent.”
Although the Fed initially proposed a cap of 12 cents per transaction, its final rule took an array of expenses into consideration, including the cost of fraud-prevention technology and equipment. The appeals court deemed inclusion of those costs to be in line with the spirit of the amendment.
Not all aspects of the case were decided in the Fed’s favor. The court asked the central bank for more explanation of the legal basis for a part of the rule that permits banks to use the debit fees to recoup the cost of monitoring transactions.
Nevertheless, Fed spokeswoman Susan Stanwick said, “the board is pleased with the outcome of the appeal.”
While the pricing of interchange has dominated the conversation around the Durbin amendment, the rule also addressed the lack of competition in the payment system. The law said merchants must have multiple networks to conduct debit card transactions. The Fed required that each debit be processed on two independent networks for verification — one for PIN and one for signature.
Merchants argued that the law was supposed to give them more flexibility and choice. They wanted at least two signature options, which Leon permitted. The reversal of his ruling puts the kibosh on an argument that some banks used to justify delaying the replacement of magnetic-strip cards with chip cards, which are considered less of a fraud risk.
Despite being pleased with Friday’s outcome, Carrie Hunt, senior vice president of government affairs at the National Association of Federal Credit Unions, said the Fed’s rule imposes below-cost caps on interchange fees and fails to provide for a reasonable return.
Merchants are not giving up just yet. Attorney Doug Kantor of Steptoe & Johnson, who represents the National Association of Convenience Stores and other retailers in the case, said his team is contemplating the next step, which could lead them all the way to the Supreme Court.