Retailers scored a victory Wednesday when a federal judge tossed out a Federal Reserve rule on fees banks can charge merchants when they swipe customers’ debit cards, reports the Wall Street Journal. Saying the Fed did not do enough to limit the levies, the decision likely will force the Fed to slash those fees, further crimping a once-lucrative business for banks and card giants like Visa Inc. and MasterCard Inc.
The ruling marks the latest development in a battle between financial firms and retailers, who have long sparred over how much banks should be allowed to charge. The 2010 Dodd-Frank financial law required the Fed to ensure interchange fees reflect the actual cost of processing debit card transactions. The Fed initially proposed capping fees at 12 cents a transaction, but ultimately set the cap at 21 cents plus the potential of a few cents more to cover costs such as fraud. Before the rule went into effect, banks charged an average of 44 cents a transaction, according to the WSJ.
Several leading retailers of small-ticket items, including 7-Eleven Inc., Burger King Corp. and Starbucks Corp., had urged the judge to toss out the Fed rule. The court brief filed by the companies said debit costs for small transactions had soared since it went into effect. Card companies used to charge merchants lower fees for small transactions, but that went away after the rule.
The ruling will not have an immediate impact on debit fees, the WSJ reports. It temporarily postpones enforcement of the decision, citing the potential disruptive effects to an industry that has been complying with the Fed rule for nearly two years. U.S. District Court Judge Richard Leon in Washington set an Aug. 14 court hearing to discuss what should happen next, and suggested he would give the Fed “months, not years” to fix the regulations.
In his opinion, Judge Leon said the Fed rule amounted to an “utterly indefensible” interpretation of the Dodd-Frank law. The rule, he said, “runs completely afoul of the text, design and purpose” of a Dodd-Frank amendment authored by Sen. Richard Durbin, (D., Ill.) to limit the fees. Judge Leon said the Fed arrived at the higher fees by factoring in bank costs that clearly weren’t permitted by Congress. The Fed can appeal the ruling with a Washington-based federal appeals court, which might mean that a final resolution of the issue could drag on.