WASHINGTON–The nation’s retailers have filed a lawsuit seeking to have the Federal Reserve lower its 10-year-old cap on the swipe fees being charged to process debit card transactions, saying the agency wrongly applied federal law and that merchants have paid billions of dollars more than intended by Congress while banks’ costs have fallen.
NAFCU issued a statement following the filing of the lawsuit saying it's time for fans of the Durbin Admendment to admit it's a failure.
“The Fed allowed fees that were much too high in the first place,” National Retail Federation Chief Administrative Officer and General Counsel Stephanie Martz said. “Since then, banks’ costs have fallen steadily but the Fed has refused to make adjustments, letting the problem grow even worse. Legislation passed by Congress requires that these fees be kept in proportion to costs to protect merchants and their customers, but the Fed has failed to do that.
“Since the Fed hasn’t acted voluntarily, it’s time for the courts to enforce the law. Retailers are paying twice what they should and these fees ultimately drive up prices paid by the public,” Martz continued. “Banks should not be handed a growing windfall at the expense of Main Street stores and consumers.”
The suit against the Federal Reserve Board of Governors was filed by the North Dakota Retail Association and the North Dakota Petroleum Marketers Association in U.S. District Court in Bismarck. NRF is not a party but Martz is co-counsel in the case.
Banks ‘Stick Hands in Pockets’ of Merchants
“North Dakota merchants are willing to pay a reasonable fee for a service, but they’re tired of seeing Wall Street banks stick their hands into the pockets of local businesses,” said Mike Rud, president of the joint associations. “These fees are far higher than they need to be and take too much money out of the local economy.”
The lawsuit claims the cap is higher than allowed under 2010’s Durbin Amendment, which directed the Fed to set regulations resulting in debit card swipe fees that were “reasonable” and also “proportional” to banks’ costs, the NRF noted.
But the suit argues that the Fed exceeded its authority by going beyond costs Congress said could be considered in writing its regulations. It seeks to have the cap recalculated and regularly adjusted if banks’ costs continue to fall in the future.
“For a decade, the board has failed to properly follow Congress’s instructions,” the lawsuit says. “Because the board has not done what Congress said to cure this market failure, American consumers and merchants continue to suffer the same harms that prompted Congress to act in the first place. Enough is enough.
“The Durbin Amendment limited costs the Fed could consider to incremental expenses in authorizing, clearing and settling transactions,” the NRF continued. “The law specifically said other costs ‘shall not’ be considered.”
Congress’ Intent is ‘Flouted’
In its statement, the NRF said based on those costs, the Fed initially proposed that the fees be limited to 7-12 cents per transaction.
“Under pressure from banks, however, officials ‘flouted Congress’s decision’ by going back and taking fixed costs into consideration along with fraud losses, transaction monitoring and network processing fees,” the NRF said. “The final cap, which applies only to financial institutions with $10 billion or more in assets, was set at 21 cents plus 1 cent for fraud prevention and 0.05% for fraud loss recovery.”
The retailers noted banks are free to charge a higher amount provided that they set debit swipe fees themselves rather than following fees set by Visa and Mastercard, but no major banks have done so.
The NRF noted that since 2011, the Fed has reviewed banks’ costs every two years as required by Durbin but has “failed to adjust its regulations to keep fees proportional as costs have fallen despite repeated concerns voiced by NRF and other retail groups.”
‘Stratospheric Increase’
A survey by the Fed found bank costs allowed under Durbin averaged 8 cents per transaction as of 2009, the year before the law was passed. Based on that, the 21-cent figure gave banks an average profit of 163 percent, according to the suit.
“But subsequent Fed surveys show the costs had steadily fallen to 3.6 cents as of 2017, increasing the average profit to a ‘stratospheric’ 483% that ‘in other sectors might prompt antitrust or price-gouging investigations’,” the suit states. “Banks are now charging almost six times their average cost, compared with less than three times when the regulations first took effect.”
According to the retailers, the amount allowed by the regulations “grows less reasonable and proportional with every passing year.”
NAFCU Response
"It is time for proponents of the Durbin Amendment to recognize the failure of the policy,” said NAFCU President and CEO Dan Berger. “When Congress debated the amendment, supporters promised consumers would see billions of dollars in savings via lower prices through a government-sponsored price control on interchange fees.
“Those savings have yet to materialize for consumers nearly 10 years after the Durbin Amendment went into effect. Instead, retailers and merchants have filled their own coffers. And, today, they are trying to expand this failed policy for their own financial gain at a time when policymakers should be abandoning it.”