Retailers Want Fed To Revisit Debit Swipe Fees

Radial Chareback

Merchants are preparing a new battle in the seemingly never-ending debit-card interchange fee wars.

A quick refresher for readers who thought that was all won and done.

The Durbin Amendment to the Dodd Frank Act required the Federal Reserve to limit debit swipe fees to a level that was “reasonable and proportional” to the actual cost of processing a transaction.

The amendment was passed following lobbying by the merchants and, of course, counter lobbying by the card networks and banks.

The Fed ultimately settled on a 21 cent cap plus 0.05% of the transaction for fraud recovery (up from their original proposal of 12 cents). The final rule also allowed another 1 cent for fraud prevention in most cases – which (since it went into effect in 2011) has basically set debit interchange to a maximum of 24 cents per transaction.

That resulted in a big decline.

Pre-2011, debit card interchange fees averaged in the 44 cent range. But merchants had been hoping for more — and the Fed made a preliminary ruling that led them to think they would.

With the final ruling, the merchants claimed that the Fed ignored the letter of the law.

They sued.

A federal judge agreed with the merchants, hammered the Fed for doing the bidding of the banks, and ordered the Fed to recalculate the cap in a way that would have made if far lower. Unfortunately for the merchants, the D.C. Circuit Court of Appeals reversed the judge’s decision and sided roundly with the Fed.

Finally, the Supreme Court chose not to hear the case, which seemed to end the debate about the Fed’s debit interchange fee cap and declared the networks and banks the winners.

After a short lull, though, the National Retail Federation marched back into battle, firing a missile at the Fed, and the card networks, in the form of a letter from NRF’s senior vice president and general counsel, Mallory Duncan, to the Federal Reserve Board of Governors.

The NRF says that time has come to take up the debit interchange question again, noting that the improvements made have still failed to live up to the actual standard set by Congress.

“In most cases, 24 cents per transaction represents a significant savings over the prior non-competitive pricing,” Duncan noted. “However, it is still substantially higher than issuers’ incremental costs.”

This, Duncan noted, has been the case since the reforms were initially enshrined since the rates settled upon were well outside of the any reasonable consideration of bank’s costs. The NRF further called out excessive lobbying for the cause of the initial miss in the regulations.

“Federal Reserve staff calculated the average cost at 4 cents per transaction and proposed a cap no higher than 12 cents,” the letter said. “Nonetheless, after heavy lobbying from banks, the Federal Reserve Board of Governors eventually settled on 21 cents plus 0.05 percent of the transaction for fraud recovery and allowed another 1 cent for fraud prevention in most cases.”

According to Duncan, the issue has gotten a bit more complicated now that EMV has gone into effect – since its intention is to lower (or move) some of the costs of card fraud away from the banks. This, the NRF notes, means both that .05 percent price per charge and 1 cent additional security charge are out of date.

“The issuer fraud costs shifted onto merchants has been enormous. It appears that costs far beyond the claimed costs of counterfeit cards are being shifted by issuers onto merchants despite initial assurances by the major networks that such would not happen,” Duncan wrote.

He went on to argue that, “Some mid-sized merchants already have seen issuer-asserted counterfeit card costs rise from tens of thousands of dollars to over $1 million per month. If fraud costs anywhere near these amounts are being transferred from issuers to merchants, then the five basis point fraud allowance in the current standard may no longer have a legitimate basis.”

The card network and the banks haven’t responded yet to Duncan’s missive. Based on past experience, the networks and the banks at least will.

The battle will be joined. Lawyers and lobbyists for both sides will amass.

We’ll have to wait to see whether any of this will move the Fed, which never asked to be involved in the war in the first place, and would rather be thinking deeply about interest rates and economic growth.

More to come.