Federal Judge Rules Fed Set Swipe Fee Limits Improperly

In response to a swipe fee reform law passed in 2010, the Fed proposed a debit interchange fee cap of 7-12 cents per transaction in its initial rulemaking in December 2010. However, in its July 2011 final rulemaking, the Fed set a debit interchange cap of about 24 cents, effectively doubling the initially proposed rate. 

That prompted a The National Retail Federation, Food Marketing Institute, National Association of Convenience Stores, Oil Miller Co. and Boscov’s Department Store LCC to file the initial complaint challenging the ways the Federal Reserve set the cap. On Wednesday, U.S. District Court Judge Richard Leon ruled that the Federal Reserve lacked the authority to set the limit the way it did.

“From the very beginning, retailers and restaurants knew the Federal Reserve Board of Governors had grossly misapplied the swipe fee law, also known as the Durbin Amendment,” said Senior Vice President and General Counsel Mallory Duncan. “They failed to heed Congress’ call to set fee standards that were ‘reasonable’ and ‘proportional’ to the actual cost of a transaction. Instead, the Board manufactured a standard that was two to three times higher than the Fed staff recommended. As a result, small ticket transactions, such as those imposed on convenience stores and restaurants, skyrocketed under the misapplied law.”

 

The judge ruled that the Fed deviated from Congressional intent and allowed for the inclusion of additional costs, outside the scope of the permissible costs incurred by a card issuer in a debit transaction. This inclusion raised the overall debit interchange cap, costing consumers and small business billions of dollars, said Sen. Richard Durbin, (D-IL), the author of the swipe fee legislation who wrote an amicus brief challenging the Fed’s interpretation of the law.

 

Durbin noted that U.S. swipe fees have historically been among te highest in the world. Last week, the European Commission proposed a debit interchange cap of 0.2% which closely aligns with the 7 cent cap proposed in the Fed’s initial rule.

 

“By requiring debit card fees to be reasonable, and by cleaning up Visa’s and MasterCard’s worst abuses, small businesses and their customers will be able to keep more of their own money and common sense and fairness – not big bank profits – will be the guiding force of the swipe fee system,” said Durbin.

 

Duncan agreed that the Fed flouted Congress’s clear instructions to introduce competition and transparency into the debit card marketplace by making multiple networks available.

 

“The Fed failed to do so, and the court rightly ruled against them as a result,” Duncan said. “Today’s decision is the first step in setting these initial wrongs right and will ensure that swipe fee reform is done correctly.”