On Wednesday, July 31, a federal judge ruled that the Federal Reserve did not follow Congress’ intent when it implemented swipe fee reforms required by the Durbin Amendment of the Dodd-Frank Wall Street Reform and Consumer Protection Act in June 2011. The Fed had imposed a swipe fee cap of $0.21, but the judge’s decision is expected to force the Fed to lower swipe fee rates even more, according to the Wall Street Journal.
The lawsuit challenging the Fed’s cap on swipe fees was brought by the National Retail Federation (NRF), the Food Marketing Institute (FMI), the National Association of Convenience Stores (NACS), and two retailers in November 2011. The groups argued that the Federal Reserve adopted a “flawed cap” on debit card swipe fees, which allowed big banks to continue charging unjustifiably high fees and discouraged price competition among credit card networks.
“From the very beginning, retailers and restaurants knew the Federal Reserve Board of Governors had grossly misapplied the swipe fee law,” said NRF Senior Vice President and General Counsel Mallory Duncan. “They failed to heed Congress’ call to set fee standards that were ‘reasonable’ and ‘proportional’ to the actual cost of a transaction.”
Duncan noted that Congress told the Fed to introduce competition and transparency into the debit card marketplace by making multiple networks available, as a way to reduce swipe fees for merchants and their customers. The Fed failed to do so,” he said, “and the court rightly ruled against them as a result. “Today’s decision is the first step in setting these initial wrongs right and will ensure that swipe fee reform is done correctly.”
Sen. Dick Durbin (D-IL), the amendment’s sponsor, said that this week’s court ruling was “a victory for consumers and small business around the country and will lead to lower interchange rates for billions of debit card transactions each year. The Fed’s 2011 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.”
Under the Durbin amendment, the Federal Reserve was given the authority to develop regulations to ensure that swipe fees imposed on debit card transactions are proportional to the cost incurred in processing the transactions. The final agreement allowed the Federal Reserve to take the fraud prevention costs of banks into consideration.
As part of its rulemaking process, the Federal Reserve collected 2009 data from payment card networks that indicated the average interchange fee for all issuers was $0.43. In June 2011, when the Federal Reserve decided to set the swipe fee cap at $.21, up from an initial proposed cap of $.12, it was met with disappointment from retailers, who believed the cap-fee increase was the result of aggressive lobbying by banks and credit card companies.
In his ruling, U.S. District Judge Richard Leon in Washington explained that the Fed looked at data it was not allowed to use under Dodd-Frank to set the of $0.21 cap, as reported by Bloomberg.com.
The ruling won’t have an immediate impact on debit fees as enforcement of the decision has been postponed. A hearing on how to proceed has been scheduled for August 14.