WASHINGTON – A federal appeals court has handed a defeat to a coalition of retail groups that challenged as too high the Federal Reserve’s cap on how much banks can charge businesses for handling debit card transactions.
The ruling issued Friday by the U.S. Appeals Court for the District of Columbia overturned a lower court’s decision in July that favored the merchants and was a setback for banks.
In the July ruling, a federal judge struck down the Fed’s cap on so-called “swipe fees,” saying the Fed didn’t have the authority to set the limit the way it did in 2011, improperly including data that made the cap too high.
The retail groups had sued the Fed over its setting the cap at an average of about 24 cents per debit-card transaction. The appeals court ruling upholding the Fed’s cap was a blow to an industry already buffeted by public and congressional outrage over the massive data breach that hit Target Corp. during the holiday season and other data-security violations at big retailers.
Congress mandated a ceiling on debit-card swipe fees as part of the 2010 financial regulatory overhaul. Prior to the cap, fees averaged 44 cents per swipe. The Fed had initially proposed a 12-cent fee limit, and the retailers argued that the Fed buckled under pressure from bank lobbyists when it doubled that level.
The retailers had argued that the Fed deviated from the 2010 law’s intent by factoring banks’ expenses into the cap that the law didn’t allow.
The three-judge panel of the appeals court said that in making that argument, “far from summiting the steep hill, the merchants have barely left basecamp.” The judges said they decided to defer to the Fed’s “reasonable interpretation” of the law and to reject the retailers’ challenge.
The National Retail Federation, one of the parties that had sued the Fed, said Friday that it was reviewing the ruling and will decide whether to appeal it.
“NRF is disappointed and remains confident that the Federal Reserve erred when it set the swipe-fee cap far higher than intended by Congress,” Mallory Duncan, the group’s senior vice president and general counsel, said in a statement. “The Fed ignored congressional intent, and worked to shield debit-card companies and big banks.”
The Fed, which had appealed the lower court ruling, said Friday that it was pleased with the appeals court decision.
The banking industry welcomed the ruling. “Reasonable minds have prevailed,” Richard Hunt, president of the Consumer Bankers Association, said in a statement.
Hunt said the group still believes the mandate for a fee cap is flawed, but also acknowledges that further changes to the fees “would only pile on the negative consequences for consumers.”
“Make no doubt about it – consumers must come first in this process, not the bottom-line of retailers,” Hunt said.
The American Bankers Association, the industry’s biggest lobbying group, the Independent Community Bankers of America and the National Association of Federal Credit Unions also said they were happy with the appeals court decision.
The fight over debit card fees pitted two powerful and politically influential industries against each other, with billions of dollars at stake.
Banks had lobbied hard against the Fed’s originally proposed cap, saying the lower fees wouldn’t cover the cost of handling transactions, maintaining their networks and preventing fraud. Attempts by some big banks to compensate by charging consumers monthly fees for using debit cards sparked a nationwide furor in late 2011, leading the banks to drop their plans.
Banks and big retailers also have faced off more recently over the Target data breach, which affected an estimated 40 million credit and debit card accounts. At issue is which industry bears more responsibility for protecting consumers’ personal information.
The retailers argue that banks must upgrade the security technology for the credit and debit cards they issue. The banks retort that newer electronic-chip technology wouldn’t have prevented the Target breach, and retailers must tighten their own security systems for processing card payments.
The Fed’s cap is the first limit on debit card fees. Before it took effect in October 2011, banks had negotiated such fees with merchants. A big chain like Starbucks would likely get a better rate than a local coffee shop because it handles more customers. The fees were typically based on a percentage of the purchase price.
In addition to the National Retail Federation, the suit against the Fed was brought by the National Association of Convenience Stores; the National Restaurant Association; the Food Marketing Institute; Boscov’s Department Store, a chain of 40 stores based in Reading, Pa.; and Miller Oil Co. of Norfolk, Va., which operates convenience stores and gas stations.
Miller Oil has said it used to pay about 16 cents per transaction in debit swipe fees.
The Fed rule doesn’t apply to credit cards, government-issued debit cards, prepaid cards or cards issued by banks and credit unions with assets under $10 billion.