By E. Scott Reckard
5:19 p.m. AKDT, July 31, 2013
Retailers long have complained about paying too much for debit-card processing — the "swipe fees" that are invisible to most consumers but add up to billions of dollars a year.
Now, a judge in Washington has ruled in their favor, slapping down the financial industry and mightyFederal Reserve.
In a scathing opinion Wednesday, U.S. District Judge Richard Leon agreed with retailers that the Fed went too easy on big banks in 2011 when it set the limit on such fees at 21 cents for each transaction, overruling its own staff's recommendation for a cap of 12 cents.
As part of the Dodd-Frank financial reforms passed after the Great Recession, Congress required the Fed to cap the fees at a level "reasonable and proportional" to the transaction costs, plus the cost of anti-fraud measures for debit purchases.
Although the Fed reduced the fees sharply from the 44 cents that previously prevailed, the 21-cent limit didn't come close to meeting the legal standard, the judge ruled.
"The court concludes that the [Federal Reserve] Board has clearly disregarded Congress' statutory intent by inappropriately inflating all debit-card transaction fees by billions of dollars," Leon wrote.
The Fed also failed to ensure that merchants would have access to "multiple unaffiliated networks" to process each debit-card transaction, as the Dodd-Frank provision, sponsored by Sen. Richard J. Durbin (D-Ill.), had required, the judge wrote.
Leon didn't specify what changes must be made to comply with his order invalidating the Fed rules. He said his ruling would not take effect until at least Aug. 14, when he scheduled a status conference to take up questions on how to implement new rules.
Leon's ruling is the latest twist in the long and bitter battle between retailers and banks over debit fees.
Retailers cheered the decision, saying it would help consumers. A coalition of financial industry lobbyists denounced it, saying in a statement that it would only increase the "financial windfall" that retailers have enjoyed since the Fed reduced the swipe fees two years ago.
The Fed didn't disclose whether it would appeal the ruling, saying only: "We are reviewing the judge's opinion."
Groups representing retailers, who had asked the judge to invalidate the Fed's 21-cent cap, said Leon's decision was a boon for consumers because merchants pass along debit-processing fees invisibly by raising prices for purchases however they are made.
A statement from the National Retail Federation, a plaintiff in the lawsuit, said the central bank had flouted Congress' intent and "grossly misapplied the swipe fee law," as Mallory Duncan, senior vice president of the trade association, put it.
The Merchants Payment Coalition countered that the ruling would put a stop to "unconscionable price gouging."
The Food Marketing Institute, which represents groceries and pharmacies, said it "will ultimately result in lower costs at the checkout line by billions."
But Frank Keating, chief executive of the American Bankers Assn., said the ruling was flawed because it disregarded certain costs associated with debit transactions. In a statement, he said Leon's decision "will harm banks of all sizes and make it more difficult for institutions to serve their customers."
The Fed should "pursue all legal means to mitigate the harm this decision will cause," Keating said. "This result must be reversed."
Small banks and credit unions, which had been exempted from the fee cap, roundly criticized the decision as well.
"As it stands, the court's ruling will have an irreparable, detrimental impact on credit unions' ability to ensure their members receive the services they need," the National Assn. of Federal Credit Unions said.