Leon 'Lights Fire Under Fed' on Swipe Fees

Judge says he will vacate rules if board doesn't act quickly; could make banks repay retailers

Richard Leon
Richard Leon

WASHINGTON -- A U.S. federal judge on Wednesday opened the door for banks and credit-card companies to repay retailers millions of dollars in transaction fees tied to debit cards, following a recent court ruling that said the Federal Reserve set the fees too high, reported Dow Jones.

At the first hearing since the court threw out the interchange or "swipe" fee rules last month, U.S. District Court Judge Richard Leon also blasted the Fed, whose rules govern the fees banks can charge to merchants for accepting debit cards. Judge Leon criticized the central bank for its inability to answer a question about its options for rewriting the rules.

A Fed attorney said the central bank has a range of options available if it foregoes an appeal and rewrites the interchange rule, but that no decisions had yet been made. That position provoked the ire of Judge Leon, who said the Fed already should have made a decision.

"They can come from Nantucket, they can come from where they are on vacation" and make a decision, the judge said, referring to the Fed's board of governors. He also insisted that the Fed's top lawyer, Scott Alvarez, be prepared to answer his questions at another hearing next week.

In addition, Leon said he wanted to hear from those involved with the merchant-led lawsuit against the Fed about having banks and credit-card companies repay merchants for fees that were collected under the current structure but shouldn't have been. While banks and card firms could fight any type of recoupment effort, it could be a windfall for merchants, who could stand to regain millions or more if such a push was successful.

The decision by Leon last month to throw out the Fed's rules on interchange fees is the latest twist in a long-running fight between merchants and banks over who should bear the cost when a customer uses a debit card. Retailers have long argued the fees are substantially higher than the actual cost of processing a transaction. Banks say the fees help cover infrastructure and other costs associated with a payments system that allows customers to immediately access funds around the globe.

The judge's decision allowed current fees to stay in place for now. On Wednesday, Leon said he could move ahead and vacate the current rules if the Fed doesn't present a viable option to quickly make changes to the current system. He said he wants the Fed to be ready by next week to weigh in on how much time it needs to rewrite the rules, signaling that he believes new fees could be in place as soon as October.

"I expect the board knows how to act expeditiously," he said.

The National Retail Federation (NRF) welcomed Leon's insistence that the Fed move quickly on issuing new regulations to reduce debit-card swipe fees paid by retailers and consumers.

"We're very pleased to see the court light a fire under the Fed," NRF senior vice president and general counsel Mallory Duncan said. "These fees have been driving up prices for merchants and their customers for years, and every day that it continues is one day too long. The court is absolutely correct that this is a multi-billion-dollar issue with huge implications for the U.S. economy and needs to be dealt with immediately.

In a lawsuit brought by NRF and others--the National Association of Convenience Stores, National Restaurant Association, Food Marketing Institute, Miller Oil Co. and Boscov's Department Store LCC (NACS v. Board of Governors of the Federal Reserve System, U.S. District Court, District of Columbia)--Leon ruled last month that the Fed ignored instructions from Congress when it set a 21-cent cap on debit-card swipe fees charged by the nation's largest banks in 2011, reducing the fees from an average of about 45 cents per transaction. Leon said the cap was too high because the Fed included expenses that went beyond banks' "reasonable" and "proportional" costs of processing debit transactions as allowed by Congress.