Retailers prevail in debit-card fee ruling
The ruling Wednesday by U.S. District Judge Richard Leon in Washington handed a victory to a coalition of retail groups seeking a lower cap, and delivered a setback to banks. The retail groups had sued the Fed over its setting of the cap at an average of about 24 cents per debit-card transaction.
The previously unregulated "swipe" fee averaged 44 cents. The Fed initially proposed a 12-cent cap, and the retailers argued that the Fed buckled under pressure from bank lobbyists when it set the cap at double that level.
The Fed now must craft a new rule. In the meantime, the current one will remain in effect.
The cap is the first limit on debit-card fees. Before it took effect in October 2011, banks negotiated such fees with merchants. A big chain such as Starbucks, because it handled more customers, would likely get a better rate than a local coffee shop. The fees were typically based on a percentage of the purchase price.
The Fed rule was called for by the 2010 financial-overhaul law. In his ruling, Leon said the Fed disregarded the intent of Congress by "inappropriately inflating all debit-card transaction fees by billions of dollars and failing to provide merchants with multiple unaffiliated networks for each debit-card transaction."
The retailers' lawsuit maintained that the cap was an "unreasonable interpretation" that exceeded the authority given to the Fed by the 2010 law. The suit also asserted that the Fed wrongly interpreted a provision of the law that required that merchants have a choice of which bank network handled their transactions.
Leon agreed with the retailers' complaint that the Fed deviated from the law's intent by factoring bank expenses into the cap that the law didn't allow. He noted in the ruling that the Fed changed its view that the only costs that should be considered were those involved in the authorization, clearing, and settlement of a transaction.
Instead, the ruling said, the Fed added costs such as losses from fraud that were outside the scope of the law - "a blatant act of policy-making that runs counter to Congress's will," Leon wrote.
In June 2011, the Fed set the cap for what banks could charge merchants at 21 cents for each debit-card transaction, plus an additional 0.05 percent of the purchase price to cover the cost of fraud protection.
The National Retail Federation, one of the parties that brought the suit, said the Fed had "grossly misapplied" the law and failed to follow Congress' call to set "reasonable" standards for fees in proportion to banks' costs for transactions.
"As a result, small-ticket transactions, such as those imposed on convenience stores and restaurants, skyrocketed under the misapplied law," Mallory Duncan, the group's senior vice president and general counsel, said in a statement.
The Consumer Bankers Association, which represents large U.S. banks and regional banks, said the new ruling "will create even more chaos for consumers and small banks."