Fed’s Feeble Swipe Fee Rule Is an Unauthorized Sop to Big Banks

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The Federal Reserve Board just gave the biggest banks in the United States a $4 billion annual present and flagrantly disregarded the law to do so. 

As part of the Dodd-Frank Act, Congress passed a provision called the Durbin amendment that regulates the fees that banks charge on every debit card transaction. These fees—swipe fees—are higher in the U.S. than anywhere else in the developed world because of the banks’ anticompetitive practices and are a $17 billion/year boondoggle for U.S. banks, with the money ultimately coming out of American consumers’ pockets in the form of higher retail prices. 

Congress directed that swipe fees be set as “reasonable and proportional” to the incremental cost of authorizing and clearing a debit card transaction. Congress instructed the Federal Reserve to pass regulations clarifying this, but also instructed the Fed that it could not include any other bank costs in determining what is “reasonable and proportional,” just the cost of performing the actual individual transaction.

The Fed responded with a pair of alternative proposed rules. One would have given the banks a safe harbor if they charged no more than 12 cents per transaction, the other if they charged no more than 7 cents per transaction. But when the Fed came out with its final rule on June 29, the safe harbor had changed to 21 cents per transaction plus 0.05% of the transaction amount.

While this is a matter of cents on individual transactions, when multiplied by the billions of debt card transactions that occur each year, it translates into a $4 billion annual gift to the banks. That’s $4 billion that will be padded onto the cost of goods and services consumers purchase, meaning a wealth transfer from families to the 100 biggest banks of roughly $40 per family per year. That’s (almost) a full tank of gas or an evening out for many families. Put another way, that $4 billion is nearly half of the $9.5 billion that the NFL makes in a year. This is real money.

So what changed? How did the Fed find religion and change from 7 or 12 cents to 21 cents? The Fed received no new data between the proposed rule and the final rule. Instead, it was barraged by an intense, full-court press lobbying effort by the banks. For months, Metro cars in the District of Columbia were slathered from end to end with bank lobbying ads opposing the Durbin amendment. The banks also took to the airwaves and even produced TV commercials. On no other regulatory issue have the banks engaged in such a prominent, sustained, and lavish public lobbying effort.

As the result of this lobbying the Fed decided to include in its calculation costs other than those that Congress specifically directed to be included. This was not an issue left to the Fed’s discretion. Congress was adamant that no other costs be included in the “reasonable and proportional” calculation. The Fed chose to ignore the clear directive of Congress in order to do a favor for the 100 largest banks.

On top of the transaction-specific processing costs already included in its proposed rule in December, the Fed threw in fixed processing costs, network fees, transaction monitoring costs, and the costs of processing chargebacks and other nonroutine transactions. The law says which costs may be considered and which costs may not (and the legislative history leaves no doubt on this matter). But the Fed bought an argument, concocted by lawyers for Visa and the banks, that there was a third category of costs that the law did not address and which the Fed therefore had the discretion to include. 

The Fed was created in 1913 to be an independent, apolitical regulator. Yet here we see the Fed bending over backwards to help out the banks, to the point that it simply disregarded the law. Sadly, this is only the latest example.

During the financial crisis, the Fed simply announced that long-standing prohibitions on affiliate transactions under sections 23A and 23B of the Federal Reserve Act would not apply. In so doing, it allowed the protection of deposit insurance to cover all sorts of speculative nonbank activities.

Similarly, the Fed refused to follow the law passed in the wake of the S&L crisis that mandates “prompt corrective action” if bank capital levels fall beneath clear tripwires. The Fed only started applying the prompt corrective action requirement after the big banks had been cleared with the 2009 stress tests, and then applied it with a vengeance to the too-small-to-matter community banks.

And, of course, when the financial crisis hit, the Fed was all too eager to bail out the too-big-to-fail banks through the use of powers that had never been contemplated by Congress to work the way they were used.

The Fed was designed to be politically insulated, but it is turning into a rogue agency that is insulated only from the quaint idea of following the law, not from the wishes of the banks.

It seems that the last people we can trust to regulate the banks are the bank regulators.

Adam J. Levitin is a Professor of Law at Georgetown University.

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Law and regulation