Federal Court Ruling on Debit Card Swipe Fee Cap Touted as ‘Critical Victory’
A federal judge’s ruling overturning the Federal Reserve’s 2011 regulated rate for debit card swipe fees, on the grounds that it was set higher than intended by Congress, has been greeted with approval by food retailers.
On Wednesday, Aug. 6, U.S. District Judge Daniel Traynor of the U.S. District Court for the District of North Dakota granted summary judgment in a federal lawsuit filed by truck stop and convenience store Corner Post in 2021 against the board of governors of the Federal Reserve System regarding Regulation II, the federal law governing debit card swipe fees. Watford City, N.D.-based Corner Post was joined in the lawsuit by the North Dakota Retail Association and the North Dakota Petroleum Marketers Association.
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“Grocery customers and food retailers across the country won a critical victory in our fight against unreasonably high debit card swipe fees,” asserted Leslie G. Sarasin, president and CEO of Arlington, Va.-based FMI – The Food Industry Association. “The debit regulated rate was initially set by the Federal Reserve in 2011. Since then, the Fed’s own data has shown that banks’ costs to process debit card transactions have gone down dramatically but the rate charged to food retailers and all other merchants has not been adjusted.”
Added Sarasin: “FMI remains hopeful that this ruling will spur the Fed to finalize its debit regulated rate rulemaking that lowers the rate and establishes a process for regular updates. Ensuring a ‘reasonable and proportional’ debit regulated rate, as required by law, is critically important to keeping prices low for customers in the slim-margined grocery industry.”
FMI has contended for decades that the debit card swipe fees charged to merchants were too high. In December 2022, the trade organization filed a formal petition for rulemaking with the Fed on this issue. The Fed voted to issue a proposed rule to adjust the debit regulated rate in October 2023, and public comments were filed in May 2024. The final debit regulated rate rule has been pending with the Fed since that time.
The ruling was also welcomed by businesses beyond the grocery channel.
“We are glad to see this well-reasoned decision,” said Doug Kantor, a member of the executive committee of the Washington, D.C.-based Merchants Payments Coalition (MPC) and general counsel for the National Association of Convenience Stores. “This case shows that banks have swiped a windfall of billions of dollars per year in debit fees from Main Street that go far beyond normal, competitive profit margins. The Federal Reserve should quickly rewrite its rules to cure this problem and reduce the inflationary pressure these fees impose on the entire US economy.”
In his ruling, Judge Traynor vacated the regulations setting the rate, but placed the move on hold pending any appeal “to prevent interchange transactions from becoming a completely unregulated market.” The order doesn’t prevent the Fed from implementing the still-pending 2023 proposal to lower the rate.
Under the regulations established in 2011, banks that have at least $10 billion in assets and follow rates set centrally by Visa and Mastercard may charge up to 21 cents per debit card transaction plus 1 cent for fraud prevention and 0.05% of the transaction amount for fraud loss recovery. The 2023 proposal would lower the base amount to 14.4 cents and the amount for fraud loss to 0.04%, but would increase the amount for fraud prevention to 1.3 cents.
According to MPC, the proposal didn’t go far enough because it would lower the amount banks can charge by less than a third, even though banks’ average cost of processing a transaction has dropped by nearly 50%, from 7.7 cents just before the rate was set, to 3.9 cents as of 2021.
The MPC represents retailers, supermarkets, convenience stores, gasoline stations, online merchants and others working toward a more competitive and transparent card system.
“As merchants have argued for 14 years, the Fed’s broad attempt to allow big banks to essentially charge rent-seeking fees for debit card transactions is illegal,” observed Stephanie Martz, chief administrative officer and general counsel of the Washington, D.C.-based National Retail Federation and a co-counsel in the case. “That question is now settled. If the Durbin Amendment [which regulates debit card interchange fees charged to merchants by banks] is to mean anything, it’s that there are specific costs that banks can recover from merchants, and costs that they categorically cannot recover from merchants. This court was correct in discerning this distinction. And the court was correct in requiring the Fed to set rates based on individual transactions, not a blended average. We fully expect this decision to be sustained on appeal, and to save merchants hundreds of millions of dollars.”
