Swipe Fee Reform Gets Its Day in Court

WASHINGTON, D.C. -- One year after going into effect, swipe fee reform landed in federal court yesterday with attorneys for merchants arguing that the Federal Reserve overstepped its bounds by catering to banks instead of doing what Congress instructed in legislation reforming debit card swipe fees.

"Congress was clear about setting reasonable debit swipe fees and ensuring greater competition among card networks. It's also clear that the Fed ignored Congress," said Doug Kantor, an attorney for the merchants who have sued the Federal Reserve in the U.S. District Court for the District of Columbia.

According to the Merchants Payments Coalition and UnfairCreditcardFees.com, the fees charged to swipe both debit and credit cards for purchases total about $60 billion in revenues for banks and credit card companies, costing U.S. households hundreds of dollars a year. For merchants, swipe fees are the second highest cost for them, after labor. Swipe fees also have tripled since 2004, even while technology has lowered the cost of card transactions, the group said.

Swipe fee reform came with the passage of the Durbin Amendment, part of the Dodd-Frank Wall Street Reform Act. It capped debit card interchange rates for issuing banks with more than $10 billion in assets at 21 cents per transaction, plus one cent for issuers with an effective fraud prevention system, and 0.05 percent of the volume of transaction, as CSNews Online previously reported.

However, the retail community has long argued the reform did not go far enough. According to the Merchants Payments Coalition, the amendment instructed the Fed to set debit swipe fees that are "reasonable" and "proportional" to the banks' costs. The Fed had determined the cost to be 4 cents a swipe.

The group said the banking lobbying convinced the Fed to factor into the costs of running a bank into the fee, rather than focusing on the banks' cost of handling a debit transaction. In addition, according to a release, the Fed also undercut Congress' intent to make the debit card industry more competitive by not allowing merchants to choose among networks to process a sale. As a result, consumers and merchants have not realized the savings they could have, and fees have actually increased for debit card purchases less than $15.

"In too many instances, swipe fees eat up a merchants' profit," said Kantor.

In response to the final swipe fee reform, several associations filed a lawsuit challenging the Federal Reserve's final rules -- including NACS, the Association for Convenience & Fuel Retailing, the Food Marketing Institute, the National Restaurant Association and the National Retail Federation. All of them are members of the Merchants Payments Coalition, a group of retailers and merchants who are concerned about the rising costs of swipe fees on both debit and credit cards.