A U.S. Appeals Court ruled Friday that the Federal Reserve was within its bounds when it set new limits on debit card fees, tossing out a lower court's ruling against the cap.
The decision hands a victory to banks and a defeat to retailers in what has been one of the longest-running battles in Washington, with billions of dollars at stake.
The court determined that the Fed did not exceed Congress’s intent in setting the new “swipe fee” limits, in part because Congress did not specifically order it to keep it as low as possible. The provision in the law was written in such a way that the Fed had discretion to set the cap as it saw fit, the court ruled.
And given that the court found the language of the provision ambiguous in places, it deferred to the Fed's interpretation. The only area where the court questioned the central bank's approach was in its handling of transaction-monitoring costs.
“Reasonable minds have prevailed in vacating the District Court’s ruling to affirm the existing rule," said Richard Hunt, president and CEO of the Consumer Bankers Association. "While we still believe the underlying rule is flawed, any further changes to the currently allowed interchange rates would only pile on the negative consequences for consumers."
The ruling is the latest chapter in the fight between banks and retailers over the provision, known as the Durbin amendment. Included in the Dodd-Frank financial reform law, it directs the Fed to cap the fees that banks can charge retailers for processing a debit card payment.
The Fed settled on a swipe fee cap of 21 cents per transaction in 2011, which could climb to 24 cents in certain cases. While the final cap was a significant boost from the one first proposed by the Fed, it was still a significant drop from the industry average of 44 cents per transaction that previously existed.
A group of retailers, miffed that the cap had climbed from the 7-to-12 cents originally proposed by the Fed, filed a lawsuit to challenge the decision.
A major trade group for retailers said it is considering an appeal of Friday's ruling.
“NRF is disappointed and remains confident that the Federal Reserve erred when it set the swipe fee cap far higher than intended by Congress. The Fed ignored congressional intent and worked to shield debit card companies and big banks,” said Mallory Duncan, the senior vice president and general counsel at the National Retail Federation.
The Dodd-Frank provision on swipe fees required the Fed to set a cap that is “reasonable and proportional” to the actual costs of processing a debit card transaction. But retailers and banks have long fought over whether costs tied to the business of offering debit cards, like fraud prevention and transaction monitoring, should be considered part of those costs.
Retailers have argued that just the costs of actually processing a transaction should be considered in setting the fee, while banks have pushed for a broader interpretation.
In July, U.S. District Court Judge Richard Leon ruled that the Fed ignored the will of Congress in setting the cap too high and ordered it to rewrite its rules. The Fed appealed that ruling, setting the stage for Friday’s appeal.
The new ruling will surely set off a fresh round of fighting between banks and retailers.
Banks say Congress had no right to set the terms of private business and that retailers would not pass the savings from lower fees on to consumers.
Retailers, in turn, have blasted banks as driving up the cost of swiping a debit card, using it as a piggy bank to reap profits for a service that is far cheaper than what retailers are paying.
— This story was updated at 12:55 p.m.