WASHINGTON -- Several retail groups on suit in federal court yesterday saying the Federal Reserve failed to follow requirements of a financial reform law when it set the cap on debit card swipe fees and should set the cap lower.
The National Retail Federation, the Food Marketing Institute, the National Association of Convenience Stores and two retailers said the policy has allowed big banks to continue charging "unjustifiably" high swipe fees and has "discouraged price competition among credit card networks."
“The Federal Reserve was required by law to come up with swipe fees that were ‘reasonable’ and ‘proportional’ but what we got were neither,” said Mallory Duncan, senior vice president of the retail group, which led the fight to cap debit fees.
The suit comes four months after a federal court dismissed a suit by big banks challenging the Fed’s authority to cap debit fees. The dismissal of the suit allowed the Fed to cap fees on debit transactions for banks and credit unions over $10 billion in assets at about 21 cents, about half the current 44 cent rate. Those institutions conduct more than 80% of all debit transactions in the U.S.
The lawsuit alleges that the Fed — under pressure from the banks and credit card industry — included costs that were barred by the law, negating some of the relief for merchants and their customers as designed under the law. “The Fed allowed themselves to be influenced by the very banks they are supposed to regulate and raised the originally proposed cap to include expenses the law said were not allowed," says the suit.
On top of the 21 cents, 0.05% was added to the transaction and, in most cases, an additional 1 cent was added for fraud prevention, which aren't allowed under the law, the suit says.
The Dodd-Frank law which required the debit cap said the Fed could consider the incremental costs of acquiring, clearing and settling each transaction and specifically prohibited any other expenses from being used to inflate those costs, according to the suit.
The plaintiffs also allege that the Fed’s final rules discourage competition among debit card networks.
To establish a competitive market between networks such as NYCE, Pulse and Plus as well as the Visa and MasterCard, the law required that merchants be given a choice of two networks on every transaction.
Yet, under the Fed’s final regulations, banks can limit their cards so that merchants don't have a choice of networks.
"The lack of competition will allow the dominant networks to continue increasing their fees," the suit says.
