Get All Access for $5/mo

In a Win for Small Merchants, Judge Overturns Fed Ruling on Debit Card Fees In the ongoing saga between the nation's biggest banks and small retailers over swipe fees, the courts rule in favor of Main Street.

By Catherine Clifford

Opinions expressed by Entrepreneur contributors are their own.

Grand Rapids Press File Photo

Score one for Main Street. In the ongoing saga between the nation's biggest banks and small retailers, the courts today ruled in favor of small businesses.

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 right.

This is big news for retailers, who have to pay a fee, often referred to as a "swipe fee," when a customer pays with plastic. Especially for small retailers, these swipe fees can quickly add up and take a bite out of paper-thin operating margins. For banks, these processing fees rake in serious revenue.

Related: Best Credit Cards for Small-Business Owners in 2013

The strongly worded ruling from Judge Leon was in a case brought against the governors of the Federal Reserve by a group of plaintiffs including the National Association of Convenience Stores, the National Retail Federation, the Food Marketing Institute, Miller Oil Co., Boscov's Department Store and the National Restaurant Association. Judge Leon set another court date of August 14 to discuss future steps in determining how debit card purchases should be paid for.

"Retailers welcome today's ruling and the opportunity to ensure the law is finally implemented as intended," said Bill Hughes, senior vice president for government affairs at the Retail Industry Leaders Association, in a statement. "The flawed Federal Reserve rules have muted the law's intended benefits to merchants and consumers and resulted in further distortions in the already broken electronic payments market." The RILA is a trade organization representing retail companies.

The Federal Reserve Board is "reviewing the judge's opinion," according to spokeswoman Barbara Hagenbaugh.

Meanwhile, the banking industry is, not surprisingly, dismayed by the judge's ruling, saying that large and small banks will see their revenues squeezed. "We're deeply disappointed in today's court decision, which will harm banks of all sizes and make it more difficult for institutions to serve their customers," says Frank Keating, president of the American Bankers Association, a trade group representing the industry, in a statement.

Keating called for the Judge's ruling to be reversed. "We urge the Federal Reserve to pursue all legal means to mitigate the harm this decision will cause to consumers, community banks and all institutions that provide financial services to local communities," he says.

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.

Related: The Startup Money Hunt: When Entrepreneurs Bring In Investors (Infographic)

Then, in 2011, the Federal Reserve set the limit for debit card swipe fees at a much more lenient rate for banks than they first proposed. Before the Fed's ruling in 2011, the debit-card swipe fee was 1 to 2 percent of each transaction, which was about 44 cents on the average retail purchase of $38. For pricier purchases, that would equal a few dollars.

The Fed had initially suggested a 12-cent cap on the fees merchants pay for debit-card transactions, which pleased the small-business community and upset the banking industry. However, the Fed then issued a much less restrictive set of final rules. Under the rules handed down by the Fed last year, the cap for debit-card fees was 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 cap resulted in lower swipe fees than merchants had been paying, merchants had been hoping for a much more aggressive restriction.

And for retailers that predominantly make small-ticket size sales, the flat fee ended up costing them more than before the reform. For example, on a 99-cent purchase, a merchant that previously paid 8 cents to process that transaction would have to pay 22 or 23 cents.

"Today's decision is a victory for small businesses and consumers across the country," said the Merchants Payments Coalition, a group of retailers, fuel stations, online merchants and other businesses that work to ensure transparency in the credit-card processing industry, in a statement. "Considering that this cost is, on average, 4 cents per transaction, the current fee of more than 21 cents is exorbitantly high -- raising prices for consumers and squeezing merchants' bottom lines, particularly for businesses with a high volume of low-dollar sales."

Related: The Internet Sales-Tax Bill Takes a Step Forward

Catherine Clifford

Senior Entrepreneurship Writer at CNBC

Catherine Clifford is senior entrepreneurship writer at CNBC. She was formerly a senior writer at, the small business reporter at CNNMoney and an assistant in the New York bureau for CNN. Clifford attended Columbia University where she earned a bachelor's degree. She lives in Brooklyn, N.Y. You can follow her on Twitter at @CatClifford.

Want to be an Entrepreneur Leadership Network contributor? Apply now to join.

Editor's Pick


Are Your Business's Local Listings Accurate and Up-to-Date? Here Are the Consequences You Could Face If Not.

Why accurate local listings are crucial for business success — and how to avoid the pitfalls of outdated information.

Money & Finance

Day Traders Often Ignore This One Topic At Their Peril

Boring things — like taxes — can sometimes be highly profitable.


Want to Be More Productive Than Ever? Treat Your Personal Life Like a Work Project.

It pays to emphasize efficiency and efficacy when managing personal time.

Business News

'Passing By Wide Margins': Elon Musk Celebrates His 'Guaranteed Win' of the Highest Pay Package in U.S. Corporate History

Musk's Tesla pay package is almost 140 times higher than the annual pay of other high-performing CEOs.

Growing a Business

He Immigrated to the U.S. and Got a Job at McDonald's — Then His Aversion to Being 'Too Comfortable' Led to a Fast-Growing Company That's Hard to Miss

Voyo Popovic launched his moving and storage company in 2018 — and he's been innovating in the industry ever since.

Starting a Business

I Left the Corporate World to Start a Chicken Coop Business — Here Are 3 Valuable Lessons I Learned Along the Way

Board meetings were traded for barnyards as a thriving new venture hatched.