Judge: Federal Reserve 'inappropriately inflated' debit card transaction fees by billions

By Jessica M. Karmasek | Aug 1, 2013

WASHINGTON (Legal Newsline) -- A federal judge this week ruled in favor of retailers and retail trade associations, saying the Federal Reserve misapplied Congress' intent when it implemented required swipe fee reforms.

NACS -- formerly the National Association of Convenience Stores and now known as the Association for Convenience and Fuel Retailing -- along with the National Retail Federation, Food Marketing Institute, Miller Oil Co., Boscov's Department Store LLC and the National Restaurant Association sued the Reserve's Board of Governors to overturn its final rule setting standards for debit card interchange transaction fees and network exclusivity prohibitions.

Judge Richard Leon of the U.S. District Court for the District of Columbia, in his 58-page memorandum opinion, vacated the rule but stayed vacatur until further order.

Leon said he is going to give the Reserve board time to fix problems with the rule.

"Upon consideration of the pleadings, oral argument and the entire record therein, the court concludes that the board has clearly disregarded Congress' 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," the judge wrote Wednesday.

There are several fees associated with debit card transactions. The largest is the interchange fee, which is set by the network and paid by the acquirer to the issuer to compensate the latter for its role in the transaction.

As debit cards have become more popular, interchange fee rates and the direction in which the fees flow have shifted.

By the early-2000s, acquirers were paying issuers ever-increasing interchange fees for PIN transactions.

Interchange fees for signature transactions, meanwhile, were modeled on credit card fees and were even higher than for PIN.

But in recent years, interchange fees have climbed, with PIN outpacing signature debit fees.

And although there are many debit card networks in the United States, networks under Visa and MasterCard's ownership account for about 83 percent of all debit transactions and nearly 100 percent of signature transactions. Visa also owns Interlink, the largest PIN network.

Due to their market share, Visa and MasterCard exercise considerable market power over merchants with respect to debit card acceptance.

Hundreds of millions of consumers use cards that operate on Visa and MasterCard's debit networks. Merchants realize this, and know that if they do not accept those cards and networks, they risk losing sales. But losing those sales, they say, would be even costlier.

"The court has vindicated our position that the final Federal Reserve rules on the implementation of the Durbin Amendment were flawed," NACS Senior Vice President of Government Relations Lyle Beckwith said in a statement Wednesday. "We look forward to the Fed revisiting their initial analysis that concluded the actual cost of a debit transaction was only 4 cents.

"By following the law and using their own data, the Fed should produce a debit card rule that lowers these outrageous fees paid by merchants and ultimately consumers."

U.S. Sen. Dick Durbin, D-Ill. and the author of the swipe fee legislation, called the federal court's ruling a "victory for consumers and small business around the country" and said it 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," he said in a statement.

Durbin also authored an amicus brief challenging the Reserve's interpretation of the law in the federal court case.

"By requiring debit card fees to be reasonable, and by cleaning up Visa and MasterCard's worst abuses, small businesses and their customers will be able to keep more of their own money and common sense and fairness -- not big bank profits -- will be the guiding force of the swipe fee system," the senator said.

A status conference to determine the next steps in the case is set for Aug. 14.

From Legal Newsline: Reach Jessica Karmasek by email at jessica@legalnewsline.com.

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