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WASHINGTON, D.C. -- The battle over swipe fee reform played out on Capitol Hill this past spring, with the Federal Reserve setting a new cap on the cost of debit card transactions in June. Now, the National Association of Convenience Stores (NACS), Miller Oil and other groups are bringing the swipe fee battle to the courts.
The new swipe fee regulations, which in part cap the fees at 21 cents plus 0.05 percent of the transaction, took hold on Oct. 1. In a newly filed lawsuit in U.S. District Court in Washington, D.C., the plaintiffs (NACS, Norfolk-based Miller Oil Co., the Food Marketing Institute, the National Retail Federation and Boscov's Department Store) argue that the new regulations have led to increased -- not decreased -- fees for some retailers.
"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.
This past December, the Federal Reserve Board 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. The proposed cap set off a flurry of lobbying activity, pitting the retail industry against so-called big banks. When the board issued its final rule this past summer, the cap was set at more than five times the determined cost.
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, according to a NACS statement on the lawsuit.
"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 percent 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.
The plaintiffs also said 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 so 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."