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Court Rules in Favor of Retailers on Debit Card Fee Cap

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In a ruling viewed as a major victory for retailers, U.S. District Judge Richard Leon on Wednesday overturned a Federal Reserve rule placing a cap on debit card fees banks collect from merchants, according to The Washington Post.

Retailers had complained that the Federal Reserve had set the cap too high following intense lobbying by banks, and the judge agreed. Under the Fed rule, banks could charge as much as 21 cents per debit card transaction. Retailers pointed out that the Fed had originally proposed a 12 cent per transaction cap.

By the time the final rule was enacted, it covered additional items including the cost of equipment and technology designed to prevent fraud. The court ruled that this action by the Fed was improper.

Retailers argued that consumers would benefit from a lower fee since costs like these are often passed on by merchants in the form of higher prices.

Ironically, as Reuters pointed out, the cap on debit card fees, also known as the Durbin amendment to Dodd-Frank and named for its sponsor, Senator Richard Durbin of Illinois, was intended to help consumers in the first place.

What happened, as so often is the case in Washington, was lobbying – in this instance by the banking industry.

Following Wednesday’s ruling the banking industry expressed disappointment, urged the Federal Reserve to appeal the decision, and added that merchants are unlikely to reward consumers with lower prices and will simply opt to increase their profits.

The Merchants Payments Coalition, a retailing group, on the other hand said that Wednesday’s ruling “will give relief to merchants across the country and their customers, putting a stop to unconscionable price gouging that is completely at odds with the law,” according to The Washington Post.

While retailers are the big winners, banks and credit card issuers stand to have swiping fees cut more than 50 percent down to as low as 7 cents per transaction, according to a note to investors from Guggenheim Partners.

Because of the ruling, shares of the two largest operators, Visa Inc. (NYSE: V) and MasterCard Inc. (NYSE: MA), plunged Wednesday. Visa stock fell 11 percent and MasterCard dropped six percent but recovered to end slightly higher at the close of trading.

American Express Co(NYSE: AXP) dropped 1.9 percent Wednesday and Discover Financial Services (NYSE: DFS) fell 1.3 percent in late trading.

Related: Fitch: EU Card Fee Proposal Has Limited Impact on AmEx, Discover

The 21-cent cap, Reuters reported, will probably remain in place until the Fed either rewrites the rule or decides to appeal. Barbara Hagenbaugh, a Federal Reserve representative, indicated that the agency was in the process of reviewing the judge's ruling.

At the time of this writing, Jim Probasco had no position in any mentioned securities.

Posted-In: American Express Co Barbara HagenbaughNews Politics Legal Federal Reserve Media General Best of Benzinga

 

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