Retail Groups Sue Fed Over New Debit Card Rules for Banks

The Federal Reserve was sued by retailer groups over new regulations governing so-called swipe fees, claiming the Fed disregarded the law when deciding how much banks can charge merchants for debit-card transactions.

The groups, in a lawsuit filed today in U.S. District Court in Washington, said retail merchants will be “substantially harmed” by the fees the Fed set under the Durbin Amendment, a provision of the Dodd-Frank legislation passed last year. The rule went into effect on Oct. 1.

“The Board’s final rule permits banks to recover significantly more costs than permitted by the plain language of the Durbin Amendment and deprives plaintiffs of the benefits of the statute’s anti-exclusivity provisions,” the retailers argued in their complaint.

The case was filed by the National Retail Federation, the Food Marketing Institute and NACS, formerly the National Association of Convenience Stores. Oil Miller Co., a residential heating and air company based in Norfolk, Virginia, and Boscov’s Department Store LLC, based in Reading, Pennsylvania, also joined the complaint.

Susan Stawick, a spokeswoman for the Fed, declined to comment on the suit.

Electronic-Payment Networks

Swipe, or interchange, fees are set by Visa Inc. (V) and MasterCard Inc. (MA), the biggest electronic-payment networks, which collect the money and remit it to card-issuing member banks.

Dodd-Frank, the regulatory overhaul enacted in July 2010, required the Fed to ensure fees charged for debit-card purchases were “reasonable and proportional” to the cost of processing transactions.

The 21-cent cap approved by the central bank on June 29 reflected a pullback from a 12-cent limit it proposed in December. Retailers previously had been paying an average of 44 cents per transaction.

Retail and merchant groups lobbied to defend the reduction in the fees. A competing banking-industry campaign to delay the rules failed when the Senate rejected a proposed amendment in June.

In the lawsuit, the retailers allege the Fed declined to determine the incremental costs associated with a debit transaction and instead “invented” a category of costs not mentioned in the statute, giving the agency unfettered discretion in setting the 21-cent cap.

‘Competition Choice’

The retailers also challenge the Fed’s regulation of exclusivity agreements between banks and payment networks, arguing the rule doesn’t create “competition choice” among networks.

Under the rule, a debit card may allow only one network choice for signature transactions and one network choice for PIN transactions, the groups claim.

“Depending on the type of transaction the consumer chooses or the merchant’s point-of-sales capabilities, the merchant could be limited to only one network for processing the transaction,” according to the complaint.

While financial firms face the loss of half their debit-fee revenue, the question of who wins remained a tossup, the retailers said after the final rule was released.

“Retailers won’t truly be happy until they pay zero to accept cards,” said Trish Wexler, spokeswoman for the Electronic Payments Coalition, a trade group representing payment networks like Visa and MasterCard and banks including JPMorgan Chase & Co. (JPM), Bank of America Corp. (BAC) and Wells Fargo & Co. “They don’t want to pay their fair share of this system that brings them more sales and increased security, and want customers to foot the bill instead.”

Debit-Card Market

The debit-card market is massive -- more than 38 billion transactions took place in 2009 -- and its participants include grocery and electronics stores, gas stations and large retailers like Wal-Mart Stores Inc. (WMT) and Target Corp. (TGT), all of whom lobbied for limits on the power of banks and payment networks to impose fees.

In June, TCF Financial Corp. (TCB) failed to persuade a U.S. appeals court in St. Louis to block the Fed rule as the court found it was unlikely to prevail on a claim that the cap is unconstitutional.

The case is NACS v. Board of Governors of the Federal Reserve System, 11-02075, U.S. District Court, District of Columbia (Washington).

To contact the reporters on this story: Tom Schoenberg in Washington at tschoenberg@bloomberg.net; Phil Mattingly in Washington at pmattingly@bloomberg.net.

To contact the editors responsible for this story: Michael Hytha at mhytha@bloomberg.net; Lawrence Roberts at lroberts13@bloomberg.net.

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