There has been a fight brewing between the financial and retail sectors over the fees associated with swiping your debit card. In that fight, the banking industry managed to deal a blow to the retail industry this week.
The Federal Reserve said Wednesday that it will appeal the decision handed down from the U.S. District Court at the end of July, which effectively said that the central bank’s rulemaking had not sufficiently protected the retail industry.
The banking industry cheered the Fed’s move to appeal. “The Federal Reserve’s decision to appeal is the right thing to do for consumers who value debit cards and the financial institutions that serve them. We’re encouraged that all parties have asked for a stay and will seek an expedited appeal, which would avoid the market disruption and consumer harm that other alternatives would cause," said Frank Keating, CEO of industry trade group the American Bankers Association, in a statement.
The retail industry frowned upon the Fed's move. “We are very disappointed to see the Fed giving in to the banks. The facts are very clear that the Fed set the cap far higher than intended by Congress, and the court has insisted that the mistake be fixed as soon as possible,” Craig Shearman, vice president of government affairs for the National Retail Federation, said in a statement. “We want to see this case resolved today, not next year, so these fees can finally be brought under control.”
At stake in the battle is what is called the “swipe fee,” which is the processing payment a retailer has to make to a bank when a customer pays with plastic. Swipe fees are a critical source of revenue for many banks, but for retailers – many of whom are already operating on razor-thin margins – the cost of accepting plastic can take a significant bite out of profits.
As part of the sweeping Dodd-Frank Wall Street Reform and Consumer Protection Act passed in 2010, debit-card interchange fees were mandated to be "reasonable" and proportional to the costs the card-processing company incurs. The Fed had initially suggested a 12-cent cap on the fees merchants pay for debit-card transactions, but in a bit of a surprise move, it ended up mandating that the cap be set at 21 cents per transaction, plus 0.05 percent of the value of the purchase and a 1-cent fraud-prevention fee for the big banks. While the Fed’s cap brought the debit-card swipe fee down significantly from the 44 cents it had been averaging previously, the cap was much less stringent than the retail industry had hoped.
Earlier this summer, the judge for the United States District Court for Washington, D.C., Judge Richard Leon declared that the Federal Reserve was "non-compliant with Congress's clear mandate" when it set fees for debit card transactions in 2011.
The move by the Fed to appeal Judge Leon’s decision was largely expected, according to Greg Smith, analyst for the brokerage firm Sterne Agee. Smith says the ruling is an “obvious positive” for the likes of Visa and MasterCard, according to an analyst report he authored.
Also, Smith says he expects the interchange rates, or “swipe fees,” to remain consistent during the appeals process. Possible outcomes could include the Circuit Court of Appeals upholding the judge's July 31 ruling that the rules to be rewritten, the Federal Reserve winning and the swipe fees and rules would stand as they are, or the Court upholding certain aspects of Leon’s ruling and overturning others, says Smith.