Court orders lower cap on swipe fees

Retailers won a huge victory on Wednesday as a judge ordered the Federal Reserve to lower the limits on swipe fees for debit card transactions.

U.S. District Judge Richard Leon struck down the 21-cent cap set by the Fed nearly two years ago as too high, saying the central bank had ignored the will of Congress.

“The Board has clearly disregarded Congress’s statutory intent 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,” Leon wrote in his ruling.

{mosads}The judge ordered the cap to remain in place until the Fed completes new regulations or interim rules on swipe fees, but made clear that he wanted to see a new cap in “months, not years.”

The bank regulator could opt to appeal the ruling, and banks were eager to push it to continue the fight.

“We urge the Federal Reserve to pursue all legal means to mitigate the harm this decision will cause,” said Frank Keating, head of the American Bankers Association. “This result must be reversed.”

A Fed spokesman said the bank was reviewing the opinion.

The decision is the latest turn in a long-running, high stakes battle between banks and retailers over the “Durbin Amendment” that created the caps.

That provision, included in the Dodd-Frank financial reform law, requires the Fed to place limits on how much banks can charge retailers for debit-card transactions. The fees have been the source of a heated lobbying battle for years, with billions of dollars at stake.

The language of Dodd-Frank directs the Fed to set limits that are “reasonable and proportional” to the actual costs of transmitting a debit card transaction. Retailers had long argued that banks were reaping hefty amounts from fees that were well above what was needed to process a transaction.

But banks have argued the government has no business meddling in the matter, and that caps would require the financial industry to trim account-holder perks and boost fees elsewhere.

Sen. Dick Durbin (D-Ill.), the titular author of the swipe fee cap, hailed the court ruling as a win for consumers.

“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,” the Senate majority whip said in a statement.

Durbin has kept up pressure on the swipe fee front, sending a letter to Fed Chairman Ben Bernanke earlier this month urging him to reconsider the rules after the European Commission opted for lower swipe fee caps.

“Regulators in the United States have been slow to act and have fallen behind the global curve. We believe regulators in our country must act affirmatively to rein in abusive fees and practices in the electronic payments system, and we hope that the European Commission’s announcement serves as a wake-up call to action,” Durbin wrote in the letter, which was co-signed by Rep. Peter Welch (D-Vt.).

The financial industry blasted the ruling, arguing it would further line the pockets of retailers already benefiting from government-ordered price fixing.

“This new ruling will create even more chaos for consumers and small banks. Congress ought to save families from this uncertainty by repealing this government mandated price-fixing,” said Richard Hunt, president and CEO of the Consumer Bankers Association.

“We certainly hope retailers return to their free-market principles as they did when opposing the proposed government ban on big-gulp sodas in New York,” Hunt said.

The Fed finalized the fee cap in October 2011. The 21-cent limit, which could climb as high as 24 cents depending on certain circumstances, was a major reduction to existing rates. Before the limits were put in place, banks were charging retailers an average of 44 cents per transaction.

Nonetheless, the final limit was a win for banks, who were originally facing a 7- to 12-cent cap in the original Fed proposal.

Retailers and merchants, who fought hard to defend the Durbin amendment from bank-backed efforts in Congress to delay or repeal it, were harshly critical of the hike to 21 cents and filed suit one month later.

The National Retail Federation (NRF) said Wednesday’s ruling was a necessary correction after the Fed “grossly misapplied” the law.

“Today’s decision is the first step in setting these initial wrongs right and will ensure that swipe fee reform is done correctly,” said Mallory Duncan, the NRF’s senior vice president and general counsel.

Another major lobby group for retailers said the decision gives the Fed a chance to “ensure the law is finally implemented as intended.”

“The flawed Federal Reserve rules have muted the law’s intended benefits to merchants and consumers and resulted in further distortions in the already broken electronic payments market,” said Bill Hughes, senior vice president for government affairs at the Retail Industry Leaders Association.

— This story was first published at 10:24 a.m. and has been updated.