Fed Upheld on Debit Card Swipe-Fee Cap by Appeals Court

A customer pays for groceries at a Wal-Mart store in Los Angeles,. Photographer: Patrick T. Fallon/Bloomberg

Retailers including Wal-Mart Stores Inc. and Target Corp. were handed a defeat by a U.S. appeals court, which upheld Federal Reserve rules governing how much banks can collect for debit-card transactions.

The Fed’s regulations, challenged by a national retail group, were based on a reasonable reading of the law, Judge David Tatel of the U.S. Court of Appeals in Washington wrote for a three-member panel. The judges also approved Fed rules that merchants said curbed competition on debit-processing networks dominated by Visa Inc. and MasterCard Inc.

The decision leaves in place a Fed regulation dating to October 2011 that cut the average swipe fee by almost half to about 24 cents a transaction, costing the banking industry an estimated $8 billion a year. Retailers sued the Fed, saying if it had followed the law, the fee they pay for each use of customer’s debit card would have been cut more and network competition enhanced, lowering their payments to the banks.

The National Federation of Retailers “remains confident that the Federal Reserve erred when it set the swipe fee cap far higher than intended by Congress,” the group’s general counsel, Mallory Duncan, said in a statement. “The Fed ignored congressional intent and worked to shield debit card companies and big banks.”

Lower Court

Today’s decision overturned a lower-court ruling that sided with the retailers and “provides clarity and closure on this issue,” Jason Kupferberg said in a note from Jeffries LLC.

It was “a big win” for the payments industry, especially Visa, as the company can keep its 70 percent share of the signature debit-card market, JPMorgan Chase & CO. said in a research note.

Visa, the world’s biggest payment network, rose 0.7 percent to $223.37 in New York. The shares have climbed 41 percent in the past 12 months. MasterCard fell 3 percent.

Paul Cohen, a spokesman for Foster City, California-based Visa, declined to comment on the ruling.

Retail groups are considering whether to seek review by the full appeals court or the U.S. Supreme Court, Doug Kantor, an attorney for the convenience store trade group NACS and other plaintiffs, said in a phone interview.

‘Disappointing’ Decision

“The decision is disappointing and not consistent with what Congress wrote in the law,” said Kantor of Steptoe & Johnson LLP.

The retailers contended the central bank added in costs that under the Dodd-Frank financial reform law it wasn’t allowed to consider in setting the cap, inflating debit-card transaction fees by billions of dollars.

The Fed “is pleased with the outcome of the appeal,” Susan Stawick, a central bank spokeswoman, said in an e-mailed statement.

“Reasonable minds have prevailed,” Richard Hunt, president and chief executive officer of the Consumer Bankers Association, said in a statement lauding the decision.

The decision and the resulting stability will allow the industry to move ahead with converting security on debit cards from magnetic strips to EMV chip technology, Jim Issokson, a spokesman for Purchase, New York-based MasterCard, said in an e-mailed statement.

Debit Transactions

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.

Swipe, or interchange, fees are set by Visa and MasterCard, the biggest electronic-payment networks, which collect the money from merchants and remit it to banks that issue the cards. Lower fees can mean lower costs for retailers.

While batting away most retailers’ arguments against the Fed’s regulations, Tatel also was critical of the so-called Durbin Amendment, the portion of Dodd-Frank law that provides the framework for limiting the power of banks and payment networks to impose fees.

Congress put the Fed and the courts “in a real bind” with confusing language and a convoluted structure, Tatel wrote. “But because neither agencies nor courts have authority to disregard the demands of even poorly drafted legislation, we must do our best to discern Congress’s intent and to determine whether the board’s regulations are faithful to it.”

Senator Dick Durbin, an Illinois Democrat and lead sponsor of the amendment, said Congress was clear in its language and intent.

The decision is a “giveaway to the nation’s most powerful banks and blow to consumers and small businesses,” Durbin said in a statement.

The case is NACS v. FRS, 13-5270, U.S. Court of Appeals for the District of Columbia (Washington).

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