US merchant lobby groups have filed a suit against the Federal Reserve over allegations that the US central bank caved in to bank demands to raise the cap on debit fees by including expenses that were not permissible under law.
The National Retail Federation, the Food Marketing Institute, the National Association of Convenience Stores and two retailers say the Fed's actions has allowed big banks to continue charging "unjustifiably high swipe fees" and has discouraged price competition among credit card networks.
"The Federal Reserve was required by law to come up with swipe fees that were 'reasonable' and 'proportional' but what we got were neither," says Mallory Duncan, NRF senior vice president and CEO General Counsel. "Instead, the Fed allowed themselves to be influenced by the very banks they are supposed to regulate and raised the originally proposed cap to include expenses the law said were not allowed. In doing so, they literally gave away half the savings that could have been seen by merchants and their customers. We want them to go back and follow the law this time."
Responding to the Durbin amendment under the Dodd-Frank act, the Fed initially proposed a swipe fee cap of 12 cents per transaction. But when the bill was eventually passed seven months later in July 2011 the cap had been raised to 21 cents, plus 0.05 percent of the transaction and, in most cases, an additional 1 cent for fraud prevention.
While the Dodd-Frank law said the Fed could consider the incremental costs of acquiring, clearing and settling each transaction and specifically prohibited any other expenses from being used to inflate those costs, the lawsuit alleges that the Fed - under pressure from the banks and card industry - included costs that were barred by the law.
The suit also argues that Visa and MasterCard's plans to charge the maximum fee even on small-ticket transactions has the perverse effect of raising costs for smaller retailers who previously benefited from the one-to-two percent charging regime.
NCCR executive director Rob Green says: "Congress passed this law to cap swipe fees but the banks have turned a ceiling into a floor and raised fees dramatically higher for quick-service restaurants across the nation. This clearly was not the intent of Congress."