Last Wednesday, the Federal Reserve Board announced that it will appeal the July 31 ruling of the U.S. District Court for the District of Columbia regarding debit card interchange fees. The Fed appeal relieves U.S. banks from the immediate prospect of a substantial cut in their debit card interchange fees.
The Fed also plans to ask the court to stay its ruling pending the appeal, which would keep the fees where they are now, averaging approximately 24 cents per swipe. Interestingly, the merchant groups that brought the action against the Fed (i.e., the National Retail Federation, the National Association of Convenience Stores, and the Food Marketing Institute) also support a stay, which will prevent banks from charging whatever they want for debit card transactions pending the outcome of the appeal, which could take a year or more.
For U.S. banks that issue debit cards, the Fed appeal forestalls the prospect of a substantial cut in their debit card interchange fees, clearly a positive development for these banks. We noted in early August that a significant cut in debit card fees would be harmful to the top five debit card issuing banks, Bank of America Corporation (Baa2 review direction uncertain), Wells Fargo & Company (A2 review for downgrade), JPMorgan Chase & Company (A2 review for downgrade), U.S. Bancorp (A1 stable), and PNC Financial Services Group Inc. (A3 stable). Smaller debit card issuers, such as TD Bank U.S. Holding Company (A1 stable), Regions Financial Corporation (Ba1 stable), and TCF Financial Corporation (unrated), that historically have gotten a larger share of their pre-tax pre-provision income from debit interchange fees will also be adversely affected. All the debit card issuing banks stand to lose billions of dollars of fees if the court ruling is upheld.
The Fed appeal is modestly negative for Discover Financial Services (Ba1 stable). If the rule is overturned, it would open the signature debit market to greater competition. Discover is in the process of expanding its PULSE debit network to compete for signature debit volume in addition to its traditional PIN debit business.
Curt Beaudouin is a vice president and senior credit officer with Moody's Investors Service. This post originally appeared in the firm's August 26 Credit Outlook.