Research and Statistics

Swipe fee battle renewed after court ruling


Merchants won a victory in their long-running battle with banks over debit card swipe fees, potentially raising consumer costs for checking-related services

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Merchants have won a victory in their long-running battle with banks over debit card swipe fees, potentially raising consumers’ costs for checking account services.

The U.S. District Court for the District of Columbia ruled July 31 that the Federal Reserve should reduce its 21-cent cap on debit card transactions.

The cap was established in 2011, cutting banks’ transaction fee revenue by about one-half for signature transactions and one-quarter for PIN transactions and intensifying a battle with retailers. If affirmed, the ruling would further cut banks’ ability to charge fees to retailers for debit card transactions.

“The cap has already caused banks to raise the amount (of fees),” said Madeline Aufseeser, senior analyst at Aite Group who covers credit and debit cards.

Like most aspects of the dispute, the effect on consumers is cloudy. Surveys by found that while there have been increases in minimum balances, ATM fees and checking account fees, the trend toward charging consumers more for checking accounts predates the swipe fee cap. Direct fees to consumers on debit transactions remain a rarity.

The 21-cent cap stays in place for now, but the judge said the Fed needs to go back to the drawing board and come up with a lower threshold, based on his reading of the Dodd-Frank Act, the 2010 federal law that mandated there be some sort of cap.

Banking groups howled at the new ruling, saying it will make it more difficult to serve customers. The cap applies to banks with more than $10 billion in assets, or roughly the 50 largest U.S. banks.

This result must be reversed.

— Frank Keating
American Bankers Association

“This result must be reversed,” American Bankers Association President Frank Keating said in a statement.

Aufseeser estimated that the 21-cent cap has subtracted $8.3 billion from banks’ annual revenue industry-wide.  In response, free checking offers have shrunk, fees for checking have gone up and minimum balances have risen, she said.

Ruling elates retailers
Retailers say the ruling affirms their argument that banks are overcharging for transactions. “This fundamentally means that we won on all counts,” the National Association for Convenience and Fuel Retailing said in a statement. “Retailers welcome today’s ruling and the opportunity to ensure the law is finally implemented as intended,” said Bill Hughes, senior vice president for government affairs for the Retail Industry Leaders Association, which represents large retailers.

The Fed could appeal, or it could relaunch its rulemaking process to come up with a lower cap, in line with the court ruling. “We are reviewing the judge’s opinion,” a representative said, refusing to comment further.

Under Dodd-Frank’s Durbin amendment, debit interchange fees must be proportional to the issuer’s transaction costs. District Judge Richard Leon found that the Fed erred when it included costs for transaction hardware and other fixed costs that debit networks face. Strictly per-transaction costs such as authorization and clearance costs belong in the transaction fee, he ruled.

In the strongly worded opinion, Leon said that the Fed’s rule clearly conflicts with the language of Dodd-Frank and with statements made by Sen. Richard Durbin, author of the transaction fee cap.   He set an Aug. 14 hearing to discuss what to do next.

The Fed had initially set a 12-cent cap before bumping it up to 21 cents. Banks say that the lower value fails to recover all the costs associated with providing debit transactions, and that retailers pocket the difference.

The lower transaction cost would increase competitive pressure on banks that are below the $10 billion-assets level to reduce their transaction fees as well, said Vivica Ware, executive vice president for regulatory policy of the Independent Community Bankers of America.

In the two years that the cap has been in place, some smaller banks and credit unions have been able to gain customers, Aufseeser said, because of their lower costs for checking accounts than large institutions.

Analysts expect that lower transaction fees, if upheld, will hit the profits of banks, but the impact on consumers is unclear. Visa and MasterCard are unlikely to lower their pricing to carry transactions, leaving banks to absorb a hit of about 2 percent to 3 percent of their profits, analysts at Credit Suisse concluded. Analysts at Keefe, Bruyette and Woods expect the Fed to appeal the ruling within 30 days, bumping the conflict up to the circuit court level — and sending the battle of industries into yet another round.

See related:Fed caps debit swipe fee at 21 cents, Despite cap, swipe fees rise for small-dollar purchases

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