Debit Card Fees for Retailers May Soon Decrease
For most retailers, the largest operating expense other than payroll is debit card fees. On July 31st 2013 retailers won a potential victory when Federal Judge Richard Leon found a fee determination made by the Federal Reserve to be inconsistent with the debit card fee restrictions set forth by Congress.
When consumers use their debit cards to pay retailers, network owners such as Visa and MasterCard charge retailers multiple fees. Network owners charge retailers a switch fee for providing the software and infrastructure needed for the debit transactions to occur and an interchange fee that is given to the banks that issue the debit card to the consumer (issuing banks). The interchange fee is used to cover the cost of the issuing banks’ transaction; however, the fee received by issuing banks often exceeds their expenses because network owners have an incentive to increase interchange fees so that issuing banks choose their network over others. The result has been a large increase in fees to retailers.
To address this problem, Congress passed legislation coined the “Durbin Amendment” which provides that any fee compensating an issuing bank “shall be reasonable and proportional to the cost incurred by the issuer.” Seeking to implement this legislation, the Board of the Federal Reserve passed a rule on July 20th 2011 which permitted each issuing bank to receive a fee as high as 21 cents per transaction plus .05% of the transaction’s value.
Federal Judge Richard Leon struck down the fee determination made by the Federal Reserve, ruling in favor of retailers such as the National Retail Federation, the National Association of Convenience Stores and the National Restaurant Association. Judge Leon stated that “Congress did not empower the Board to make policy judgments that would result in significantly higher interchange rates.” According to the Judge, the Federal Reserve went afoul of the Durbin Amendment by allowing costs that were not permitted by the statute to be factored into the interchange fee. Such costs included losses from fraud, monitoring costs, fixed authorization, clearing and settlement costs, and network processing fees.
Judge Leon has remanded the fee determination back to the Federal Reserve asking that the Fed make changes to the interchange fees which reflect his decision. The fate of retailers with regard to debit card fees is still uncertain as it unclear whether the Federal Reserve will appeal. Without an appeal, it is estimated that current fees would remain in place through 2014. The Federal Reserve’s rule is not applicable to credit cards, government-issued debit cards, prepaid cards or cards issued by banks and credit unions with assets under $10 billion. Given that interchange fees from retailers to issuing banks totaled nearly 17 billion in 2009, retailers should keep an eye out for either an appeal or a new fee determination from the Federal Reserve.