Next Round Begins in Debit-Card Swipe Fee Battle

NACS, other groups file lawsuit over Fed’s reform rules

WASHINGTON -- Flawed debit-card swipe fee reform regulations issued by the Federal Reserve have allowed big banks to continue charging unjustifiably high swipe fees and discouraged price competition among credit card networks, according to a lawsuit filed in federal court yesterday by NACS and NACS member Miller Oil Co., among others, as reported in a CSP Daily News Flash yesterday.

The regulations, which took effect October 1, have led to an increase in debit-card swipe fees in some cases, according to the plaintiffs: NACS, Norfolk-based Miller Oil Co., the Food Marketing Institute, the National Retail Federation and Boscov’s Department Store.

“The Federal Reserve missed an opportunity to give consumers the relief that they deserve and this needs to be corrected,” said NACS president and CEO Hank Armour.

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 required the Federal Reserve to set guidelines that would result in debit-card swipe fees that are “reasonable” and “proportional” to banks’ costs in processing debit-card transactions. Financial institutions with less than $10 billion in assets were exempt.

The Fed said in December 2010 that it had determined that it costs banks an average of 4 cents to process a debit transaction, and proposed that the fees be capped at no more than 12 cents per transaction--triple the banks’ actual cost. After intense lobbying by the banks and the card industry, however, final regulations released in July 2011 set the cap at more than five times the actual cost--21 cents plus 0.05% of the transaction and, in most cases, an additional 1 cent for fraud prevention.

While the Dodd-Frank law said the Fed could consider the incremental costs of acquiring, clearing and settling each transaction and specifically prohibited any other expenses from being used to inflate those costs, the lawsuit alleges that the Fed--under pressure from the banks and card industry--included costs that were barred by the law.

“The proposed rules followed the law, but the Federal Reserve Board changed its view of the law midcourse and without justification when issuing the final rules,” said Doug Kantor, a partner at the Washington law firm of Steptoe & Johnson and lead counsel in the lawsuit. “Not only did the final version fail to introduce competition, it provided a loophole for the big banks to exploit and actually increase some fees. The Fed’s job was to implement the law as written and it did not do that.”

The approximate 21-cent cap would lower debit-card swipe fees for most purchases, which averaged 44 cents but could range as high as several dollars under the previous formula of 1% to 2% of the transaction amount. This fall, however, both Visa and MasterCard announced that they would charge the maximum amount even on small-ticket transactions that previously cost merchants as little as 6 to 8 cents.

“Forcing small businesses to pay three times as much to the big banks on small purchases was clearly not the intent of the law and is further evidence that the Fed got it wrong,” Kantor said.

Added NRF senior vice president and CEO general counsel Mallory Duncan, "The Federal Reserve was required by law to come up with swipe fees that were ‘reasonable’ and ‘proportional’ but what we got were neither. Instead, the Fed allowed themselves to be influenced by the very banks they are supposed to regulate and raised the originally proposed cap to include expenses the law said were not allowed. In doing so, they literally gave away half the savings that could have been seen by merchants and their customers. We want them to go back and follow the law this time.”

The plaintiffs also said that the Fed’s final rules discourage competition among debit-card networks. In order to establish a competitive market between networks such as NYCE, Pulse and Plus, as well as the Visa and MasterCard networks, the law required that merchants be given a choice of two networks on any transaction. Under the Fed’s final regulations, however, banks can limit their cards such that merchants may never have a choice of network. The lack of competition will allow the dominant networks to continue increasing their fees.

“Reducing swipe fees is good for consumers, good for small businesses and a good way to take unnecessary costs out of the system and invigorate our country’s economic engine,” Kantor said. “By not implementing the letter and the intent of the law, the Federal Reserve Board failed in its duty and missed an opportunity to give consumers and businesses the relief they deserve. This litigation is about correcting those mistakes.”

The lawsuit, which was filed in U.S. District Court in Washington, gained immediate support from Merchants Payments Coalition spokesperson Rachel Wolf, who said yesterday, "The Merchants Payments Coalition strongly supports the goals of today’s lawsuit, and will continue to seek fairness and transparency in the payments market by pursuing action on credit-card swipe fees."