A federal judge has struck down a rule setting a cap on the fees that banks can charge merchants for handling debit card purchases. He said the Federal Reserve didn’t have the authority to set the limit the way it did in 2011, improperly including data that made the cap too high.
The ruling by U.S. District Court Judge Richard Leon on Wednesday handed a victory to a coalition of retail groups – which are seeking a lower cap – and a setback to banks. The retail groups had sued the Fed over its setting 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 had 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.
The current one will remain in effect until then.
The cap is the first-ever limit on debit card fees. Before it took effect in October 2011, banks had negotiated such fees with merchants. A big chain like Starbucks would likely get a better rate than a local coffee shop because it handles more customers. The fees were typically based on a percentage of purchase price.
The Fed rule was called for by the 2010 financial overhaul – enacted in response to the 2008 crisis. But Leon said in his ruling that the Fed disregarded Congress’s intent in passing the law 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 is an “unreasonable interpretation” that exceeds the authority given to the Fed by the 2010 law. It also asserted that the Fed wrongly interpreted a provision of the law that requires that merchants have a choice of which bank network handles their transactions.
Leon agreed with the retailers’ complaint that the Fed had deviated from the law’s intent by factoring banks’ expenses into the cap that the law didn’t allow. He noted in the ruling that the Fed changed its earlier 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.
The Fed in June 2011 formally set the cap for what banks can 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.
Sen. Richard Durbin, D-Ill., author of the provision mandating a cap on swipe fees, called Leon’s ruling a “victory for consumers and small business around the country (that) will lead to lower interchange rates for billions of debit-card transactions.”