Large banks face losing billions of dollars in revenue as a result of a U.S. court ruling that concluded the Federal Reserve’s 2011 limits on debit-card fees were too high.
The decision today by U.S. District Judge Richard Leon in Washington rejected a Fed regulation that limited swipe fees -- the money retailers pay to banks that issue payment cards -- to 21 cents per transaction, saying it violated the will of Congress.
Leon ruled that the cap must go lower, which would cut even deeper into the $16 billion dollars in revenue that banks such as JPMorgan Chase & Co. (JPM:US) and Capital One Financial Corp. (COF:US) once reaped from the fees. Revenues of processors like Visa Inc. (V:US) and MasterCard Inc. (MA:US), who set swipe fees and are paid service charges by the banks for processing transactions, could also drop.
For banks and card networks, “the only positive is that appeals and other legal maneuvers could result in the current fees remaining in place through 2014 or longer,” Jaret Seiberg, a senior policy analyst with Guggenheim Securities LLC’s Washington Research Group, said in a note to clients.
Visa, the biggest U.S. bank-card network, dropped (V:US) the most since December 2010 after the ruling, falling as much as 10.7 percent in New York trading before closing down 7.5 percent at $177.01. MasterCard, the second-biggest U.S. network, slid as much as 5.7 percent during the session and then rebounded to finish up 1.5 percent to $610.61. American Express Co. (AXP:US) was the biggest loser in the Dow Jones Industrial Average. The New York-based company’s shares fell 1.89 percent to close at $73.77.
Leon said the Fed has “months, not years” to rewrite the rule in light of his decision. He declined to stay the current rule, which has been in place since October 2011, leaving the 21-cent cap in place.
Douglas Kantor, a lawyer with Steptoe & Johnson LLP in Washington, which represented retailers in the case, said the Fed may indicate whether it intends to appeal the decision at a Aug. 14 status conference with the judge. Formally, the Fed has 30 days to decide on an appeal.
The Fed regulation came as a result of an amendment, sponsored by Senator Richard Durbin, an Illinois Democrat, to the 2010 Dodd-Frank Act that overhauled financial regulation. The provision directed the Fed to limit fees to the incremental cost of authorizing, clearing and settling a debit transaction created when a consumer swipes a debit card.
The Durbin amendment came about after a decade-long fight that pitted the banks against small merchants and large retailers such as Wal-Mart Stores Inc. (WMT:US) and Home Depot Inc. (HD:US) The stores objected to the rising fees for debit card usages while the banks argued they support the payment card infrastructure.
Leon said in his opinion that the Fed “has clearly disregarded Congress’s statutory intent by inappropriately inflating all debit-card transaction fees by billions of dollars.”
Joe Pavel, a Fed spokesman, said that the agency is reviewing the decision.
Retailers promised to use the opinion to press their case that swipe fees are too high. Mallory Duncan, senior vice president and general counsel of the National Retail Federation, which brought the case, said opposition to swipe fees is growing world-wide, citing a recent push by the European Union to cap the charges.
“The rest of the world is beginning to understand that this is a game Visa, MasterCard and the banks are playing,” Duncan said in an interview.
Madeline Aufseeser, a senior analyst with Boston-based consultancy Aite Group LLC, estimated that the Fed’s current implementation of the Durbin amendment has cost banks about half the $16 billion they once made from debit-card swipe fees each year. They take in an estimated $40 billion from credit card swipe fees, which are unaffected by the Fed rule, she said.
If the Fed responds to the ruling by reverting to its original proposal of 12 cents per transaction, revenue for the top 50 credit-card issuers who use Visa and MasterCard networks and have assets over $10 billion would drop to $4.3 billion per year, Aufseeser calculated.
Banks called on the Fed to head off the decision’s impact.
“We urge the Federal Reserve to pursue all legal means to mitigate the harm this decision will cause to consumers, community banks and all institutions that provide financial services to local communities,” Frank Keating, president of the American Bankers Association, said in an interview. “The Durbin Amendment and the court’s interpretation will have disastrous consequences for the institutions affected and the communities they serve. This result must be reversed.”
Stocks of Visa, MasterCard, and Discover Financial Services (DFS:US) fell sharply on Dec. 16, 2010 when the Fed issued its original proposal, which would have capped fees at 12 cents per transaction.
The Durbin amendment to Dodd-Frank specifies that swipe fees should be “reasonable and proportional” to the incremental cost of a transaction. A central argument the banks made to the Fed was that since Dodd-Frank was silent on the question of whether the caps should reflect “other costs” incurred by card issuers, the caps should rise to reflect them.
In its final regulation, issued on June 29, 2011, the Fed embraced the argument that fees should include these other costs, such as customer inquiries about a specific transaction. It established the cap at 21 cents, nearly twice its proposal, drawing the ire of retailers, who sued the Fed in November 2011.
Leon, who was appointed to the federal bench in 2001 by President George W. Bush, ridiculed the Fed’s reasoning in a sharply worded 58-page ruling.
Leon said that the Fed wrongly interpreted the statute on what costs Congress directed the fees to cover. The Fed decided the statute was silent on what other costs could be included in the calculation, and then moved to resolve that ambiguity by including those “other costs.”
“How convenient,” Leon wrote.
The statute and the legislative history demonstrate that Congress intended the swipe fee caps to reflect only the costs associated with an individual transaction, not any other costs, Leon said.
Durbin, who has continued to push for lower swipe fees, praised the court decision for countering the influence of bank and card processors in the regulatory process.
“The Fed’s 2011 decision to bend to the lobbying by the big banks and card giants cost small business and consumers tens of billions of dollars and did not do enough to rein in the anti-competitive, anti-consumer practices of Visa and MasterCard,” Durbin said in an e-mailed statement.
Kantor, the attorney for the retailers, said the ruling will rekindle the debate over swipe fees.
“For any issue related to swipe fees, there are political as well as legal aspects,” Kantor said. “Merchants will draw confidence from this opinion, and banks will argue against it.”
Seiberg of Washington Research Group, predicted the political dynamic in Congress wouldn’t change.
“Congress does not want to wade back into the debit interchange fight and this court ruling does not change that dynamic,” he wrote. “The issue forces lawmakers to pick between bankers and retailers. That is a no-win move for a politician.”
The case is NACS v. Board of Governors of the Federal Reserve System, 11-cv-02075, U.S. District Court, District of Columbia (Washington).
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