On July 31st the District of Columbia trial court invalidated the Federal Reserve Board’s Durbin regulation, upending the swipe fee regulation. This decision has left the industry in disarray with many open-ended questions. There was a status conference hearing yesterday, August 14, with the Fed and U.S. District Court Judge Richard Leon to discuss next steps on debit-card fees.
Read the full article below from today’s WSJ. Here are the key take-aways from this article and hearing:
- Judge noted that banks may need to reimburse some portion of the debit fees collected since Durbin was implemented (October 2011)
- Judge gave the Fed until next week to come up with a plan/timetable to lower debit interchange fees
- Fed has until end of September to appeal the Judge’s ruling…Barclays PLC, in a research note to clients after the hearing, said a Fed “appeal remains likely”
- The Fed has not commented or provided any clues as to how it will react
Stay tuned…we’ll learn more next week.
By MICHAEL R. CRITTENDEN
WASHINGTON—A federal judge threatened to further crimp a once-lucrative profit center for banks and credit-card companies, saying they may need to reimburse retailers potentially billions of dollars in debit-card transaction fees he previously ruled were set too high.
U.S. District Court Judge Richard Leon, who tossed out a Federal Reserve rule governing debit-card fees two weeks ago, raised the ante at a hearing Wednesday, suggesting banks would not only collect lower debit fees going forward but may have to reimburse “funds that have been collected but shouldn’t have been.”
“There’s a number out there somewhere that represents the amount of overcharge,” he said.
Judge Leon leveled sharp criticism at the Fed, saying the central bank must move quickly to lower fees that banks can charge merchants when they swipe a customer’s debit card.
“We’re not putting a man on the moon here,” Judge Leon said. He told the Fed it has one week to decide how much time is needed to rewrite the rule, saying the central bank’s decision makers “can come back from Nantucket, come back from wherever they are on vacation, they can come into the board room and make a decision.”
He insisted the Fed’s top lawyer, Scott Alvarez, be prepared to answer his questions at another hearing next week.
The judge’s push ratchets up pressure on the Fed, which has until the end of September to appeal the court’s ruling. Katherine Wheatley, the Fed’s associate general counsel, said at the hearing that the Fed has a range of options if it forgoes an appeal and rewrites the rule but that no decision has yet been made. A Fed spokesman declined to comment on the hearing.
Barclays PLC, in a research note to clients after the hearing, said “an appeal remains likely.”
At issue is a long-running battle between financial firms and retailers over how much banks should be allowed to charge merchants to process debit-card transactions. The 2010 Dodd-Frank financial law required the Fed to limit “interchange fees” to ensure they reflect the actual cost of processing debit-card transactions. The Fed initially proposed capping fees at 12 cents a transaction but ultimately set the cap at 21 cents, plus the potential of a few cents more to cover costs such as fraud. Before the rule went into effect, banks charged an average of 44 cents a transaction.
But the rule has had unintended consequences, driving up costs for small businesses. Several leading retailers of small-ticket items, including 7-Eleven Inc. and Starbucks Corp., had urged the judge to toss the Fed rule, saying debit costs for small transactions had soared since it went into effect. Card companies used to charge merchants lower fees for small transactions, but such differentiation disappeared after the rule and retailers can now be charged the same fee when a debit card is used to buy a pack of gum or an iPad.
Judge Leon said Wednesday the levies are creating a “substantial situation” for merchants and the economy more broadly and said banks may need to reimburse some portion of the fees already collected. He said lawyers need to devise a plan for dealing with the funds that already have been collected.
Both merchant and banking groups expressed uncertainty about the legality of recouping those fees but estimated the windfall for merchants could be in the billions. Card issuers received $15.4 billion in debit interchange revenue in 2012, according to the Fed.
Banks and credit-card firms have said the fees are needed to cover infrastructure and other costs from a payment system that has risen rapidly in recent decades and which allows customers to immediately access funds around the globe. But merchants argue the current fees are well above banks’ actual costs for processing a transaction.
“To John Q. Public, it’s probably under the radar, but to us, we do tons of transactions a month and it’s serious money,” said Jeffrey Miller, president of Miller Oil Co., which operates about 25 convenience stores throughout Virginia.
Mr. Miller, one of the plaintiffs that sued the Fed over the rule, said the impact on his business has been significant, cutting already tight margins on many of the small-dollar goods sold in his stores each day.
“When you buy a pack of gum or something like that, depending on your margin, it’s probably a better deal just to give it to them,” he said.