Fed swipe-fee challenge meets skepticism at appeals court

Andrew Zajac (c) 2014, Bloomberg News. WASHINGTON — The Federal Reserve, caught in a multibillion-dollar fight between banks and retailers over debit-card transaction costs, drew support from a federal appeals panel for its decision to cap swipe fees at 21 cents, a ceiling that could cost financial firms $8 billion a year.

The three-judge panel, hearing the Fed’s appeal Friday of a ruling that threw out the cap, was skeptical of arguments by retailers that the Fed hadn’t followed the Dodd-Frank financial reform law in setting the debit-card swipe fee. The retailers, who successfully sued the Fed in a trial court, contend the fee should be lower, and that the central bank considered too many card-provider costs in setting the cap.

“We’re trying to tell you, none of us buy that,” U.S. Circuit Judge Harry Edwards of the U.S. Circuit Court of Appeals in Washington told a lawyer for the merchants.

Circuit Judge David Tatel said that Congress intended to give the central bank room to consider costs other than those explicitly set out in the Dodd-Frank law.

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“We think there are non-incremental costs that are transaction-specific that can be included,” Tatel said.

The Fed’s appeal is the latest step in a more than four- year battle over a $16 billion revenue stream for banks that has pitted retailers of all sizes, including Home Depot Inc., Wal- Mart Stores Inc. and Target Inc., against banks led by JPMorgan Chase & Co. and Bank of America Inc. Banks stand to lose about $8 billion a year if the Fed cap stays at the current level, according to a Bloomberg Government report.

About 50 billion debit transactions took place in 2011 and the cards have eclipsed checks and credit cards as the most common form of non-cash payment, according to court documents.

The fees under the Fed’s cap are set by Visa Inc. and MasterCard Inc., which own the payment networks and pass the money from merchants to banks.

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The judges’ comments bolstered the Fed’s contention that it was correct in allowing the expenses such as computers, software and labor to be considered in setting a fee cap. They also indicate a decision in the case could turn on whether the panel thinks the collection of costs considered by the Fed was reasonable.

Retailers who sued the Fed say they’re still being gouged. While the central bank cut the average swipe fee from 44 cents, the merchants have said it would be lower still under their reading of Dodd-Frank.

The merchant’s view is in line with a decision by U.S. District Judge Richard Leon in Washington, who in July threw out the swipe-fee cap.

The Fed “clearly disregarded Congress’s statutory intent by inappropriately inflating all debit-card transactions by billions of dollars,” Leon ruled. The central bank factored into the cap costs it wasn’t allowed to consider under the law, he ruled. The Fed also failed to boost competition in card transaction processing networks, Leon said.

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The Fed, in a filing that urged the appeals court to defer to its judgment about which costs to consider in setting the cap, said Congress gave it “broad discretion” to act “as an arbiter in determining reasonable and proportional fees.”

The central bank properly included costs that Congress hadn’t addressed at all, such as equipment, hardware, software and associated labor involved in transaction processing, according to the filing.

Leon, by contrast, regarded the Fed’s task as “mechanically sifting” expenses into approved and prohibited charges without taking into account the need for “reasonableness and proportionality in incurred transactional costs,” Fed lawyers wrote.

NACS, formerly known as the National Association of Convenience Stores, and other merchant groups said in a filing that a preliminary version of the rule contemplated a swipe fee of no more than 12 cents.

“After significant pushback from banks during the comment period, the board reversed course and adopted a final rule greatly expanding allowable costs,” the retailers said.

“The board determined that it was not required even to identify, let alone distinguish between, costs that the statute required it to include and those that the statute required it to exclude,” they argued.

The Fed also erred by allowing a debit card to be limited to one network for signature transactions and another for PIN transactions, the merchant groups said. The law required that at least two competing networks be available for both types of authorization for each transaction, they said, citing Leon’s opinion.

The Fed responded that the law “nowhere provides that multiple routing options must be guaranteed in every instance,” including where the merchant itself has decided on the possible authentication methods.

The American Bankers Association and other bank and credit union trade groups said in a court filing that while the Fed’s final regulation represented an improvement over the initial 12- cent proposal, the regulator unreasonably and improperly set interchange fees that covered only a portion of the card issuer’s transaction costs.

Dodd-Frank, the regulatory overhaul enacted in July 2010, required the Fed to ensure that fees charged for debit-card purchases were “reasonable and proportional” to the cost of processing transactions.

Legislation for the swipe fee cap was written after merchants successfully lobbied for a measure pushed by Senator Dick Durbin, a Democrat from Illinois, to curb the power of banks and payment networks to impose fees. It remains in place pending the outcome of the central bank’s appeal.

In a separate case in federal court in Brooklyn, Visa and MasterCard reached a $5.7 billion settlement with merchants who sued over claims that credit-card swipe fees are improperly fixed. The National Retail Federation and dozens of merchants including Wal-Mart and Target have appealed the approval of the deal by a federal judge in Brooklyn.