The Federal Reserve Board will appeal a recent district court’s decision that rolled back the 21-cent swipe fee that was the bane of bankers and retailers alike – albeit for different reasons.
While retailers have long contended that reduced swipe fees would allow them to pass on the savings to consumers, bankers have countered that this is largely a merchant-driven campaign and the interchange cap does not account for costs like providing the debit card in the first place.
Whitman-based Mutual Bank, for example, has experienced a slight decline in interchange revenue, though Chairman and CEO Glen S. White said he couldn’t say for certain whether that is due to the Durbin Amendment, the provision of the omnibus Dodd-Frank Act aimed at reducing the financial burden of credit and debit transactions on retailers.
Originally, the Fed proposed capping interchange fees at 12 cents, but later it capped them at 21 cents, plus five basis points, plus one cent for fraud prevention where eligible.
But late last month, Judge Richard Leon of the U.S. District Court for the District of Columbia ruled in response to a suit brought by a coalition of retail trade associations that the Fed had ignored Congress’s intentions when it capped interchange fees at 21 cents and ordered the Fed to come up with a more appropriate and proportional cap.
Two weeks later, in an Aug. 14 hearing, Leon excoriated the Federal Reserve Board for its sluggishness to move on interchange fees or lower caps in the interim while it worked out a final rule.
He said during that hearing that the Fed needed to “rule expeditiously” and added, “We’re not putting a man on the moon here.”
Leon then went a step further, suggesting that lawyers from both sides of the case figure out how the financial services industry might reimburse retailers for what he characterized as “overcharges.” While Leon could not put an exact number to that figure, it could run into the billions, if accounting for the difference between the original 12-cent interchange cap the Fed suggested and the 21-cent cap it implemented since October 2011.
It’s unlikely financial institutions will have to actually pay, said Viveca Y. Ware, executive vice president, regulatory policy for the Independent Community Bankers of America.
For one thing, banks were never a party to the lawsuit, she said. For another, retailers never claimed damages in their original suit.
The National Retail Federation never asked for that money, said J. Craig Shearman, the organization’s vice president for government affairs and public relations, but “it would certainly be welcome and appropriate.”
No Effect On Community Banks
Community banks ostensibly should not be affected by the debate over swipe fees. After all, the interchange caps set by the Fed applied only to those financial institutions whose assets totaled more than $10 billion, and Shearman stuck to that point.
“The law was absolutely crystal clear that banks under $10 billion in assets are not to be covered by this law. They are not affected in any way whatsoever,” he said.
But that’s beside the point, community bank advocates argue.
“If the interchange cap falls to 12 cents, as was originally proposed, then you’re talking about a 31-cent gap between exempt and non-exempt issuers,” Ware said. “Merchants are going to pressure the networks to lower the interchange fees for community banks, as well.”
“It’s unrealistic to expect retailers to pay one price to some financial institutions and another price to others,” she said.
And while merchants argue that it doesn’t cost banks 21-cents (plus five basis points, plus a one-cent fraud-prevention adjustment in some cases, of course) to move money from the consumer’s checking account to the retailer, the interchange revenue banks receive allows them to assume a myriad of costs associated with providing that convenience to their customers.
“The banks do all of the processing details and the retailers do none. The banks assume 100 percent liability, not only for fraudulent transactions, but data breaches as well. They absorb the cost to re-issue and mail the new card, and then suffer through the perceived lax security when in fact in every case to date, a retailer or data aggregator has been at fault for the breach,” White said to Banker & Tradesman.
The still-nascent data paint a mixed picture for smaller banks. A study out of the Fed last year showed that exempt issuers saw a 4 percent decline in average interchange fees during the fourth quarter of 2011, when the caps took effect. Earlier this year, the Fed said the exemption was working and that smaller institutions received fee revenue averaging about 43 cents per transaction, the same amount they averaged during the previous study.
However, a recent study from PULSE Network showed that non-exempt issuers also saw an average rate decrease of 2 cents for both PIN and signature transactions. One in three exempt issuers surveyed in that study said they anticipated further declines in debit interchange.
Briefs on the interim interchange rule must be submitted by Aug. 28.
Email: lalix@thewarrengroup.com
