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Swipe fees are likely to come down more

If you think the reduction in bank swipe fees from 44 to 21 cents set by the Federal Reserve ended the matter, it didn’t.  

So says U.S. District Judge Richard Leon who ruled last Wednesday that the Fed ran “completely afoul of the text, design and purpose” of Congress’s intent when it set the 21-cent cap banks can charge the nation’s retailers in debit-card transaction fees.

“The Board has clearly disregarded Congress’s statutory intent,” Leon said in his ruling, “by inappropriately inflating all debit card transaction fees by billions of dollars and failing to provide merchants with multiple unaffiliated networks for each debit card transaction.” His reference was to the Durbin Amendment in the Dodd-Frank financial reform bill of 2010.

The only thing mysterious in all this is why the Fed landed on a 21-cent cap in the first place. Dodd-Frank clearly mandated the Fed to ensure swipe fees were “reasonable and proportional” to the actual cost of processing such transactions. Early on, while many critics of high swipe fees claimed the true transaction cost was more like 4 cents, the Fed had talked about a 12-cent cap. Suddenly, the central bank approved the 21-cent cap. That triggered a consortium of retailers that cried foul and sued. Thus, Leon’s decision hands a major victory to retailers.

The law makes clear that the incremental cost associated with authorization, clearing, and settlement of an electronic debit transaction is the only cost the board was authorized to consider in setting the interchange transaction fee standard, Leon said.

Notably, he also said he was inclined to give the Fed “months, not years” to rewrite the rule in light of his decision. It took the Fed more than 15 months to set the 21-cent standard.

Unless overturned on appeal, the decision will rightfully send regulators back to the drawing board to identify the real cost of a debit-card transactions and how much should be fairly added to it. Moreover, in setting the 21-cent cap, the court said the Fed used data it wasn’t even allowed to use.

Swipe fees are primarily set by the largest electronic-payment networks, namely Visa and MasterCard. They collect the money and remit it to card-issuing member banks. Dodd-Frank, however, also called for the Fed to increase competition in card networks. It failed again, Leon said in siding with the retailers’ challenge to the Fed’s regulation of exclusivity agreements between banks and payment networks, saying it doesn’t create “competition choice” among networks.

Dealers and marina operators that do a significant business with customers using debit cards shouldn’t count the extra money just yet. We won’t see a lower fee in the immediate future because the 21-cent cap will be allowed to remain until new regulations or interim standards are set. Still, banks are aggressively promoting consumer use of debit cards because increasing volumes will increase bank revenue.

Regardless of the eventual regulatory details, if Leon’s decision stands, it certainly appears to be only a matter of time before we see another major cut in swipe fees and, possibly, more payment network competition that could also drive fees even lower.

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