Fed Tells Judge Swipe-Fee Rule Rejection Will Be Appealed
The U.S. Federal Reserve will appeal a judge’s decision that its rules on debit-card transaction fees and processing were illegal, a lawyer for the central bank said.
Visa Inc. (V), the world’s biggest payments network, climbed 3 percent to $178.39 in New York, the most in almost a month, as a successful appeal could help the company maintain its market-share lead. Smaller rival MasterCard Inc. (MA) slid 0.5 percent to $619.31.
The Fed’s general counsel, Scott Alvarez, told U.S. District Judge Richard Leon in Washington that the bank would file its case with the higher court today and asked the judge to keep the rules in effect as long as the appeal is pending.
Leon said he’d leave the current regulation in place at least while he considers the Fed’s request for the longer stay. The Fed is seeking to overturn Leon’s ruling that the central bank improperly set the cap on debit-card transaction fees, known as swipe fees, at about 21 cents for each transaction, and neglected to bolster competition among payment networks.
“I’m not inclined to grant a stay, but I will keep an open mind,” Leon said.
Alvarez told Leon that if the judge lifts the stay and the appeals court rejects an emergency request to keep the rule in place, no fee caps on debit-card transactions will be in effect.
Leon’s decision, unless overturned on appeal, will force regulators to revisit rules that bankers said would cost them 45 percent of their swipe-fee revenue. Lenders collected about $16 billion annually from those fees before the Fed’s regulation and responded by cutting back on perks such as rewards programs and free checking to soften the blow to their profits.
The ruling also threatens to erode Visa’s dominance of the U.S. debit-card market and benefit MasterCard as merchants would have more say about how transactions are processed. Foster City, California-based Visa handled $1.14 trillion in U.S. debit-card purchases in the 12 months ended June 30, more than double MasterCard’s $467 billion, according to data the firms disclosed with their latest earnings reports.
In his July 31 ruling, Leon said the Fed had considered data it wasn’t allowed to use under the Dodd-Frank law in setting the 21-cent cap, and neglected the statute’s requirements to enhance competition among payment networks.
“We are somewhat surprised by the magnitude of V’s stock reaction, given that consensus was expecting an appeal,” Jason Kupferberg, a Jefferies Group LLC analyst, said today in a note to clients, using Visa’s ticker symbol. “There could be some short-covering also explaining the move.”
Shannen Coffin, a lawyer for retailers challenging the regulation, said he would support keeping the current rules in place pending an appeal that could take more than a year to resolve.
Coffin urged Leon to do all he could “to prevent us from being victims of our own success.”
Alvarez told Leon that before the rule, which took effect in October 2011, the average swipe fee was about 50 cents.
“This remains a matter between the Federal Reserve and the court,” Seth Eisen, a spokesman for Puchase, New York-based MasterCard, said in an e-mailed statement. Visa’s Paul Cohen declined to comment.
Frank Keating, the chief executive officer of the American Bankers Association, called the appeal “the right thing to do for consumers who value debit cards and the financial institutions that serve them.”
At a hearing last week, Leon ordered Alvarez to appear in his courtroom to explain whether the Fed was planning on moving forward with an interim final rule in the wake of his decision.
Alvarez said today that an interim rule would replace the current rule and eviscerate the Fed’s appeal. Shortly after the hearing, the Fed filed its notice of appeal with Leon.
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