Friday, August 22, 2014
In a remarkably sustained and intrepid campaign, retail associations and retailers led by the National Retail Federation have petitioned the U.S. Supreme Court to rule on the seemingly never-ending debate over debit card fee regulation. The NRF said it is of "staggering importance" to U.S. retailers and consumers that the nation's highest court weigh in on the implementation of the Durbin Amendment to the Dodd-Frank Act of 2010, which the NRF through its lobbying efforts helped pass into law.
Ever since the Federal Reserve was mandated by the Durbin Amendment to implement debit card interchange fee reforms and capped the fee at 21 cents per transaction, the NRF and other retail trade groups have argued that the cap was set too high, although the cap effectively reduced the amount of debit interchange that retailers had to pay by over half. The NRF wants the cap to be reduced to 12 cents per transaction.
The NRF, in conjunction with the National Association of Convenience Stores, the Food Marketing Institute, the National Restaurant Association, NRF member Boscov's Department Store, and NACS member Miller Oil Co., petitioned the Supreme Court on Aug. 18, 2014, to consider the case. These retailer advocates were behind the original lawsuit claiming that the Federal Reserve misinterpreted the Durbin Amendment's requirement that regulations be "reasonable and proportional" to the actual costs of processing electronic transactions.
The NRF said the Fed initially proposed a cap of no higher than 12 cents per transaction before settling on 21 cents "after heavy lobbying from the financial services industry."
"When a federal agency blatantly disregards the clear intent of legislation passed by Congress and signed into law by the president, that's a dispute that cannot be ignored," said NRF Senior Vice President and General Counsel Mallory Duncan.
NACS President and Chief Executive Officer Henry Armour chimed in, saying, "Debit swipe fee reform was needed to address the price-fixing of debit swipe fees that the giant card companies engaged in for the nation's largest banks. Unfortunately, the Fed overrode the language of the law and blunted the positive impact of reform. We need the Supreme Court to decide this case so that American merchants and their customers stop paying billions of dollars more than they should per year to the big banks."
Recent research suggests that the current debit card interchange fee cap has had a major impact on financial services. In Debit Profits under Pressure: Alternative Revenue Models Needed, Mercator Advisory Group said that the Durbin Amendment has severely reduced the profitability of debit cards. In this post-Durbin world, debit card issuers have been forced to find ways to make up for lower revenue from debit card fees, according to Mercator.
"To counter this decline, debit card issuers have sought ways to reduce costs and improve efficiencies relating to the DDA account and debit cards," Mercator said. "Many issuers are still struggling to find alternative revenue-generating strategies, since raising card fees or account fees have not been very successful."
Additionally, Aite Group LLC investigated the costs to retailers of different tender types, such as cash, credit cards and debit cards, and found that debit acceptance is the cheapest tender type across the board. In a July 2014 report, Tender Truths: The Real Cost of POS Transactions in the U.S., Aite said debit has become "the least expensive form of payment [for retailers], mostly as a direct result of the Durbin Amendment."
One argument debit fee reform proponents make is that retailers would pass on debit card fee savings to consumers via reduced prices. But in July 2014, payments industry advocacy organization the Electronic Payments Coalition said that those fee savings were, in fact, not being passed on by gas retailers.
"This summer, Americans are facing average retail gasoline prices of around $3.61 per gallon," the EPC said. "Unfortunately, despite the strain that these high prices place on consumers, there is still no evidence that gas retailers are passing on any of the roughly $1 billion annual subsidy they receive from the Durbin Amendment on to consumers in the form of lower prices."
EPC Executive Director Jeff Tassey added that payment networks "voluntarily capped the fees that they charge gas retailers on fuel transactions in the hope that doing so would lower gas prices for consumers. Unfortunately, gas retailers took all the money and ran – sticking their customers with the bill."
Since the debit interchange cap went into effect in October 2011, retailers, their associations, and even the Durbin Amendment's sponsor, Sen. Richard Durbin, D-Ill., have criticized the fee cap as too high. A group of retailers led by the NRF and other trade groups subsequently filed suit to get the fee cap overturned.
In late July 2013, a U.S. District Court for the District of Columbia ruled in favor of the lawsuit. "It appears that the Board [of Governors of the Federal Reserve] completely misunderstood the Durbin Amendment's statutory directive and interpreted the law in ways that were clearly foreclosed by Congress," wrote Judge Richard J. Leon, adding that the Fed had to reevaluate its implementation of debit card regulations.
However, the Fed appealed that decision. In March 2014, a three-judge panel at the U.S. Court of Appeals for the District of Columbia Circuit threw out Leon's ruling, concluding that the Fed reasonably interpreted the demands of the Durbin Amendment. Of that March 2014 ruling, Duncan said, "The Fed ignored congressional intent and worked to shield debit card companies and big banks. A self-described victory for the banks usually results in higher costs for consumers."
The NRF is also working to get overturned the controversial and long disputed $7.25 billion settlement of the class-action lawsuit brought by retailers against Visa Inc. and MasterCard Worldwide over interchange fees. The settlement was approved in December 2013 by a New York district court judge. But the NRF was disappointed by the settlement terms.
In June 2014, the association, along with RILA, filed an appeal of the decision in the 2nd U.S. Circuit Court of Appeals in New York. Duncan called the settlement a "backroom deal" among the card brands and a few large retailers that would "do nothing to bring the fees under control."
"Approval of a mandatory settlement of such breathtaking scope in the face of widespread and substantive objection is unprecedented and warrants reversal," the plaintiffs said in their appeal.
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