Banks and retailers are locked in a legal war over the fees charged to merchants for swiping a debit card.
The battle has raged since 2010, when Congress passed the “Durbin Amendment” to the Dodd-Frank financial reform law and required regulators to set limits on how much banks can charge merchants for swipe transactions.
The Federal Reserve complied, only to see its 21-cent swipe fee limit overturned in court. Now the Fed is appealing to try and reinstate the regulations, rather than go through the years-long process of rewriting them.
With billions of dollars at stake, retailers and banks have assembled heavyweight legal teams to duke it out.
Representatives from the financial industry made their case Friday that the original ruling must be tossed, allowing the Fed to put in place higher caps.
“Today’s hearing was a positive step in preserving the current allowable interchange rate,” said Richard Hunt, president and CEO of the Consumer Bankers Association. “While we still believe this rate is too low, ultimately rational minds will prevail on this issue and we look forward to the final decision of the appellate court.”
Retailers, on the other hand, fiercely contend that the Fed's first ceiling was too high and should have been tossed. They are pushing for a limit that is a fraction of that 21-cent ceiling.
“We certainly think the cap was set far too high and the Fed went way beyond any discretion it might have … and simply caved to pressure from the [banking] industry,” said J. Craig Shearman, vice president at the National Retail Federation.
Banks contend that that narrow view misses a host of other services, and that if there has to be a cap, the Fed should be free to set a higher one.
The debit rules aren’t the only battleground for the two sides, as they are also trading fire over the fees charged for credit card transactions.
Retailers are appealing a $5.7 billion settlement between Visa and Mastercard, the two biggest card providers, contending it does nothing to contain the credit card fees going forward.
Outside of the courtroom, the swipe fee war continues with verbal combat.
Banks are highlighting massive data breaches at major retailers like Target and Neiman Marcus to bolster the case against their rival.
They contend that the swipe fees so reviled by retailers actually help fund data security measures. With retailers apparently susceptible to hackers, banks are wondering why the industry, reaping savings from new fee limits, isn’t doing more to secure their networks.
“From what I understand in talking to industry experts, Target was breached because banks are currently too secure to attack and retailers now represent the weak link in the chain and that they haven't made the investments in security that the banks have,” said Tom Crosson, spokesman for the Consumer Bankers Association. “Makes you wonder what they did with all of their Durbin money.”
Retailers are swinging right back, accusing banks of not making their cards tough enough to thwart hackers.
“That claim doesn’t meet the laugh test, only a very small slice of interchange goes towards security or fraud prevention,” said Shearman. “They need to design cards that are more fraud-resistant in the first place and not try to find scapegoats.”