WASHINGTON – Retail groups that beat the banks in last year’s battle over debit fees will argue in federal court tomorrow that the Federal Reserve didn’t go far enough last year when it set the caps required by the Durbin Amendment and that the allowed fees collected by credit unions and banks on debit transactions should be billions of dollars lower still.
The retail groups, which includes the National Retail Federation, National Association of Convenience Stores, Food Marketing Institute and several individual merchants argue in a suit naming the Federal Reserve as defendant, that the Fed bowed to pressure from the powerful bank and credit union lobby when it allowed additional expenses, like certain fraud costs, to be included in the formula setting the caps. The plaintiffs also say the amendment called for merchants to have more transaction-routing choices than the Fed’s rule ultimately gave them. The rule that took effect last April says each debit card transaction must access at least one unaffiliated network.
According to most estimates, the Durbin Amendment has shifted about $8 billion in fees away from the big banks and credit unions to merchants since its enactment last Oct. 1.
The retail groups want the Fed to start the cap-setting process all over again.
Tuesday’s oral arguments in U.S. District Court for the District of Columbia come as the battle is igniting again between the two sides, this time over the proposed antitrust settlement between Visa, MasterCard and the banks with the same merchants groups over credit card fees.
The Durbin Amendment, part of the Dodd-Frank Act, required the Fed to set “reasonable and proportional” debit card interchange price controls for banks and credit unions over $10 billion in assets. The Fed originally proposed caps of 7 to 12 cents per transaction, caps that would have cut big issuers’ interchange by more than 70% over their 44-cent per-transaction average and caused an uproar in the banking industry. But after a withering lobby from banks and credit unions the Fed issued final regulations setting a price cap of 21 cents with another 1 cent pending for fraud control. That represented a cut of 47% on the average debit sale.
CUNA and NAFCU have joined the bankers in opposing the latest retailers’ suit. The group argues instead in its amicus brief that the Fed went too far in enacting the Durbin amendment because the cap on debit fees does not allow card issuers to cover their costs and a reasonable rate of return on their investments. Joining CUNA and NAFCU in the brief are: the Independent Community Bankers of America; Midsize Bank Coalition of America; Consumer Bankers Association; National Bankers Association; The Clearing House Association; American Bankers Association; The Clearing House Payments Company; and The Financial Services Roundtable.
The law called for the Fed to consider only what the plaintiffs call a “bucket” of incremental costs for authorization, clearing, and settlement, and barred it from factoring in another bucket of other costs not specific to a transaction, according to the retailers’ suit. The Fed had determined that the actual cost for authorization, clearing, and settlement was 4 cents per transaction.
Instead, according to the plaintiffs, the Fed essentially created at bankers’ behest a third bucket of costs not covered by the statute, including network switch fees; fraud losses represented by the 0.05% ad valorem versus the permitted fraud-control expenses, and some fixed hardware and software costs.