WASHINGTON – A federal judge ruled Wednesday that the U.S. Federal Reserve Board allowed banks and credit card companies to charge “inappropriately” inflated fees for using debit cards in retail transactions.
The ruling was a major victory for retailers, food sellers, convenience stores and gas stations, which pay those so-called “swipe fees” to the financial services industry.
Judge Richard J. Leon said the Fed set swipe fees that yielded “billions of dollars” more than Congress intended when it passed legislation to control those fees in 2010 as part of Wall Street reform.
The swipe fee battle pits two lobbying powerhouses — the financial services and retail industries — in a multimillion-dollar fight that so far has included dust-ups on Capitol Hill, in regulatory agencies and on advertising billboards, as well as in court.
An antitrust class-action suit involving Visa and MasterCard over credit and debit card fees yielded a proposed $7.25 billion settlement, though scores of retailers have opted out and filed objections.
The financial stakes are enormous. Swipe fees brought debit card issuers $16.2 billion in revenue in 2009, according to documents filed in the case. Buyers now use debit cards for tens of billions of transactions a year, more than a third of all noncash payments.
The lawsuit brought by the National Retail Federation, the National Association of Convenience Stores, the Food Marketing Institute, Boscov’s Department Store and the National Restaurant Association charged the Fed with improperly increasing allowable swipe fees during its rulemaking process.
The Fed had issued preliminary rules that capped swipe fees for debit card issuers with assets over $10 billion. It limited the charge to 12 cents per transaction.
But after extensive lobbying by the financial services industry, the Fed issued a final rule that allowed swipe fees of up to 21 cents per transaction and allowed additional charges in certain circumstances that took the charge to around 24 cents per transaction.
The groups who sued said the higher rate violated a part of the Wall Street reform act known as the Durbin Amendment that restricted swipe fees to an amount that let card issuers recover reasonable card administration costs and profits, but did not allow them to churn big profits from swipe fees.
The Fed countered with an argument — advanced by the financial services industry — that certain costs that were not part of “authorization, clearance and settlement” needed to be included in figuring how much card issuers could charge. In this category were such things as an “allowance for fraud losses.”
Leon sided strongly with the plaintiffs, calling the Fed’s increase of the original swipe fee limits “utterly indefensible.” The judge sent the rules back to the Fed for retooling.
“From the very beginning, retailers and restaurants knew the Federal Reserve Board of Governors had grossly misapplied the swipe fee law,” the National Retail Federation’s top lawyer, Mallory Duncan, said in a statement. “They failed to heed Congress’ call to set fee standards that were ‘reasonable’ and ‘proportional’ to the actual cost of a transaction. Instead, the [Fed] manufactured a standard that was two to three times higher than the Fed staff recommended.”
Estimates put the cost of a debit card transaction at around 4 cents.
Ron Velander operates two service stations in Minnetonka. At one of those stations, debit and credit card fees more than doubled over the past 12 years. The fees go up with the price of gas or other items as well as with new taxes on items such as tobacco.
So banks and credit card companies have profit margins built in regardless of their processing costs, said Velander, who also serves as president of the Minnesota Service Station Association.
“Certainly, you have to have card fees,” Velander acknowledged. Card issuers “have to be able to cover fraud and other things. They’re allowed to make a profit. What we’re measuring here is what their profits are.”
Minnesota-based retail giants Target Corp. and Best Buy declined to comment on the case.
The Retail Industry Leaders Association, to which Target and Best Buy belong, praised the ruling.
“Retailers welcome today’s ruling and the opportunity to ensure the law is finally implemented as intended,” Bill Hughes, the group’s senior vice president for government affairs, said 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.”
A coalition of banks, credit unions and credit card companies, including the Financial Services Roundtable run by former Minnesota Gov. Tim Pawlenty, criticized the court decision as a “windfall” for big retailers at the expense of consumers.
In a statement, the financial businesses maintained that the earlier Federal Reserve fee caps “did not allow card issuers to cover their costs while receiving a reasonable return on their investments.”