The Federal Reserve’s Board of Governors erred in letting swipe fees that banks charge retailers for each debit card transaction go as high as 21 cents a transaction, a federal court recently ruled.
The ruling by the U.S. District Court in Washington drew the predicable applause from groups such as the National Retail Federation and scorn from the likes of the American Bankers Association, or ABA, and the Credit Union National Association.
“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,” said Frank Keating, ABA president and CEO.
Keating urged 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.”
Keating insisted the ruling only serves to further line the pockets of the nation’s big-box retailers at their customers’ expense.
“It was — and still is — all about trying to help retailers increase profit margins while providing no real benefit to consumers,” he said in a press statement. “All this as retailers continue to enjoy the benefits of debit cards – from faster checkout to lower fraud costs – without paying for it or keeping their promises to U.S. consumers.”
Credit Union National Association general counsel Eric Richard said the decision could eliminate the ability of small debit card issuers, particularly credit unions, to offer payments service to their members and customers.
“The decision, no doubt, will challenge credit unions to continue their debit card programs without incurring drastic cuts in revenue, or imposing additional fees on their members — the last thing that credit unions want to do,” Richard said.
With merchants, restaurateurs and other retailers now poised to keep a larger portion of each dollar in business, an elated National Retail Federation called the ruling a belated act of justice and a correction of a federal action that went beyond anything Congress had contemplated when it enacted the swipe fee changes in the “Durbin Amendment” portion of the Dodd-Frank Wall Street Financial Reform Act of 2010.
“Today’s decision is the first step in setting these initial wrongs right and will ensure that swipe fee reform is done correctly,” the representative of 3.6 million U.S. retail establishments said in a news release.
As part of financial reform after the 2008 banking collapse, Congress insisted that the average 40 cents interchange charge, or swipe fee, on each debit card purchase be substantially lowered. The Federal Reserve Board of Governors initially considered adopting a staff proposal to lower the fee to 12 cents a transaction but issued a final rule that specified a 21-cent cap. The cap went into effect on Oct. 1, 2011.
It’s that higher cap that the federal court found fault with, calling it “arbitrary and capricious.”
Judge Richard Leon also suggested in the ruling that the Federal Reserve should consider the earlier staff proposals to lower the fee to 12 cents. Leon said he would give the Fed a few more months to respond, thus leaving the 21-cent cap in place for now, CNN Money reported.
The National Retail Federation filed the lawsuit against the Fed back in November 2011.
The cap applies only to debit card-issuing banks that have $10 billion or more in assets. But banking consultants have predicted all along that those caps would become the norm because merchants would decline cards for which higher fees were in place.
For Mississippi merchants such as Indianola convenience store chain owner Walton Gresham, paying lower debit card fees on each transaction would lighten the load on the cost side of their ledgers.
“This is the third-largest expense behind labor and utilities for business and we have no control over the cost,” the owner of 45 or so Double Quick stores in Mississippi said in a 2011 interview.
Gresham said the extra money would enable him to expand his businesses and hire more workers.
On the other hand, banks in Mississippi have been counting on the fees to offset losses in interest-related revenue.
In 2011, Trustmark CEO Jerry Host said the Jackson-based regional bank would have lost between $4 million and $6 million in the last six months of 2011 had the 12-cent cap proposed by the Fed staff been in place.
Over a full year, the lost revenue from a 12-cent cap could cost Trustmark up to $9 million in fees, Host predicted.
Sterne Agee analyst Peyton Green predicted in a “worst case” scenario that lowering the cap rates as ordered by the federal court would clip earnings per share by 3 percent to 5 percent for the top 50 banks.
Before the cap went into effect in late 2011, total interchange revenue, which included debit and credit card activity, represented 3.9 percent of revenue in the first nine months of 201 for the top 50 banks. In the first quarter of this year, interchange revenue represented 3.1 percent of total revenue.
The bottom 25 of the 50 biggest banks tend to have more debit card interchange and thus will feel more impact from the lower cap, analyst Green said.
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