The U.S. Federal Reserve, caught in a multibillion-dollar fight between banks and retailers over debit-card transaction costs, drew support from a federal appeals panel for its decision to cap swipe fees at 21 cents, a ceiling that cost banks $8 billion a year.
The judges, hearing the Fed’s appeal yesterday of a ruling that threw out the cap, were skeptical of retailers’ arguments that the Fed failed to follow the Dodd-Frank Act in setting the swipe fee cap. The retailers, who successfully sued the Fed in a trial court, contend the fee should be lower because the central bank improperly considered too many card-provider costs in setting the cap.
“We’re trying to tell you, none of us buy that,” U.S. Circuit Judge Harry Edwards of the U.S. Circuit Court of Appeals in Washington told a lawyer for the merchants during the hour-long hearing.
Circuit Judge David Tatel said that Congress intended to give the central bank room to consider costs other than those explicitly set out in the Dodd-Frank law.
“We think there are non-incremental costs that are transaction-specific that can be included,” Tatel said.
Visa Inc., the biggest processor of U.S. debit card transactions, was yesterday’s best performer in the Dow Jones Industrial Average, advancing 4.7 percent to $232.18, the most in more than eight months. No. 2 MasterCard Inc., which could gain market share from Visa if the lower court ruling is upheld, dropped 0.9 percent to $818.42.
The Fed’s appeal is the latest step in a more than four-year battle over a $16 billion revenue stream for banks that has pitted retailers of all sizes, including Home Depot Inc., Wal-Mart Stores Inc. and Target Corp., against banks led by JPMorgan Chase & Co. and Bank of America Corp.
About 50 billion debit transactions took place in 2011 and the cards have eclipsed checks and credit cards as the most common form of non-cash payment, according to court documents.
The fees under the Fed’s cap are set by Visa and MasterCard, which own the payment networks and pass the money from merchants to banks.
The judges’ comments bolstered the Fed’s contention that it was correct in allowing expenses such as computers, software and labor linked to transaction processing to be considered in setting a fee cap. They also indicate a decision in the case could turn on whether the panel thinks the collection of costs considered by the Fed was reasonable.
The judges asked several questions about the Fed’s reasoning for allocating some costs for fraud into the swipe fee and others into a separate fraud adjustment charge.
Retailers who sued the Fed say that even at 21 cents they’re still being gouged. While the central bank cut the average swipe fee from 44 cents, the merchants say it would be lower still under their reading of Dodd-Frank.
The merchants’ view is in line with a decision by U.S. District Judge Richard Leon in Washington, who in July threw out the swipe-fee cap.
Leon said the Fed had “clearly disregarded Congress’s statutory intent,” inflating all debit-card transactions by billions of dollars. The central bank factored into the cap costs it was barred from considering under the law, he ruled. The Fed also failed to boost competition in card transaction processing networks, Leon said.
The Fed, in a filing that urged the appeals court to defer to its judgment on the costs issue, said it had “broad discretion” from Congress to determine “reasonable and proportional fees.” The regulator said it properly included costs that Congress didn’t address at all, such as equipment, hardware, software and associated labor involved in transaction processing, according to the filing.
Katherine Wheatley, an attorney for the Fed, emphasized the central bank’s latitude in considering such costs.
“Between ‘must’ and ‘may not’ there’s a big empty space and that’s ‘may,’” Wheatley told the panel.
NACS, formerly known as the National Association of Convenience Stores, and other merchant groups said in a filing that a preliminary version of the rule contemplated a swipe fee of no more than 12 cents.
“After significant pushback from banks during the comment period, the board reversed course and adopted a final rule greatly expanding allowable costs,” the retailers said.
“The board determined that it was not required even to identify, let alone distinguish between, costs that the statute required it to include and those that the statute required it to exclude,” they argued.
“There are plenty of things that the board included that are not processing costs,” Shannen Coffin, of Steptoe & Johnson LLP, an attorney for the retailers, told the appeals panel.
The judges cut him off, saying they were skeptical of the argument.
The Fed also erred by allowing a debit card to be limited to one network for signature transactions and another for PIN transactions, the merchant groups said. The law required that at least two competing networks be available for both types of authorization for each transaction, they said, citing Leon’s opinion.
The Fed responded that the law doesn’t call for multiple routing options to be guaranteed for every transaction, including where the merchant itself has decided on the possible authentication methods.
Wheatley said banks and network operators are free to deploy technology that allows PIN and signature transactions to run on each other’s networks.
“There are no restrictions on cross-routing,” Wheatley said.
The American Bankers Association and other bank and credit union groups said in a court filing that while the Fed’s final regulation represented an improvement over the initial 12-cent proposal, the regulator “unreasonably and improperly” set interchange fees that covered only a portion of the card issuer’s transaction costs.
Dodd-Frank, the regulatory overhaul enacted in July 2010, required the Fed to ensure that fees charged for debit-card purchases were “reasonable and proportional” to the cost of processing transactions.
Legislation for the swipe fee cap was written after merchants successfully lobbied for a measure pushed by Senator Dick Durbin, a Democrat from Illinois, to curb the power of banks and payment networks to impose fees. It remains in place pending the outcome of the central bank’s appeal.
In a separate case in federal court in Brooklyn, New York, Visa and MasterCard reached a $5.7 billion settlement with merchants who sued over claims that credit-card swipe fees are improperly fixed. The National Retail Federation and dozens of merchants including Wal-Mart and Target have appealed the approval of the deal by a federal judge.
The case is NACS v. FRS, 13-5270, U.S. Court of Appeals for the District of Columbia (Washington).