Supreme Court rejects debit card interchange challenge

The Supreme Court handed US banks a victory as it declined to consider a challenge by a group of retailers to Federal Reserve regulations setting fees for processing debit-card transactions, debit card interchange.

The high court’s action on Tuesday, which came in a brief written order, removes

Supreme Court rejects debit card interchange challenge

uncertainty for the banking industry by ending a three-year federal court battle over fees associated with tens of billions of debit-card transactions annually, though it did little to ease a feud between banks and retail merchants on transaction fees – reports the WSJ.

“Reasonable minds have prevailed,” said Richard Hunt, president of the Consumer Bankers Association trade group. “Government mandated price controls…have yet to work as advertised and retailers still have not proved savings have been passed on to consumers.”

Mallory Duncan, general counsel of the National Retail Federation, said the decision was disappointing and means “retailers will keep paying billions of dollars more than they should, and that fee-hungry banks will continue to rake in unearned profits that ultimately come out of consumers’ pockets. We will continue to press the issue.”

The 2010 Dodd-Frank financial law required the Fed to ensure the card fees, called interchange fees, were reasonable and proportional to the actual cost of processing debit transactions. The Fed initially proposed limiting the fees to 12 cents a transaction but later settled on a cap of 21 cents, with room for a few cents extra to cover certain costs like fraud.

Merchants pay the fees each time a customer swipes a debit card. Visa Inc. and MasterCard Inc., which dominate the debit market, set the fees that are collected by banks.

The fees are now unlikely to change unless the Fed recalculates the fee cap or Congress decides to revisit the issue. Jaret Seiberg, an analyst with Guggenheim Securities, said in a note to clients Tuesday that the odds are low for congressional action. “Democrats and Republicans dislike having to choose between two business interests,” he said.

The Fed is required to review its rule every two years, and merchants said they would press the regulator to lower the fee cap. The Fed declined to comment.

Debit-card issuers were paid $16.33 billion in interchange fees in 2013, according to Fed data. Card networks processed 53.7 billion debit and general-use prepaid card transactions that year valued at $2.07 trillion.

The Fed’s final cap was lower than the average fees of 44 cents banks charged before the rule, but the regulation didn’t cut the fees as much as merchants wished. And for small-dollar transactions, the regulation allowed banks to impose higher fees than the customary rate before the new rule, retailers said.

The Fed’s rule “will unlawfully permit banks to inflate by billions of dollars each year the interchange fees they charge American merchants and, in turn, American consumers,” the challengers said in the appeal to the Supreme Court. Industry groups representing retailers, restaurants, supermarkets and convenience stores were among the parties who asked the Supreme Court to intervene.

Companies including Wal-Mart Stores Inc. and Starbucks Corp. filed amicus briefs that supported the challenge, as did Sen. Richard Durbin, (D., Ill.), author of the Dodd-Frank provision limiting the fees.

The Fed, represented by U.S. Solicitor General Donald Verrilli, said in a high-court filing that its actions were reasonable and argued the justices didn’t need to get involved because the legal issues in the case had no implications beyond the debit-fee rules. It also said that even under the retailers’ interpretation of Dodd-Frank, there was no guarantee the Fed would cap debit fees as low as the merchants wanted.

The legal battle had produced ups and downs for both sides as they fought over what types of bank costs could be considered in setting debit fees. A federal trial judge sided with the merchants in 2013, saying the Fed wrongly allowed the fees to encompass card issuers’ fixed costs like networking equipment and computer software that had nothing to do with the incremental costs of processing individual debit transactions.

The U.S. Court of Appeals for the District of Columbia Circuit reversed that ruling last March, saying it was reasonable to allow such fixed costs in the fee calculations.

The Supreme Court left the District of Columbia Circuit’s ruling in place without comment.

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