The National Retail Federation welcomed the U.S. Supreme Court’s agreement last week to take up a lawsuit seeking to have the Federal Reserve lower its 12-year-old cap on “swipe” fees banks charge merchants to process debit card transactions. The justices accepted the case after appellate courts disagreed on whether the 2021 case was brought too late.
“Some lower courts have held that the statute of limitations to challenge the cap has run out even for small businesses that didn’t exist until long after it was issued,” NRF Chief Administrative Officer and General Counsel Stephanie Martz said. “Regulations that ignore the intent of Congress and harm a business owner later don’t become less arbitrary merely by the passage of time. Basic concepts of due process and fairness require federal agencies to adhere to the laws that Congress drafts regardless of when the rules to implement those laws were issued. It’s been a dozen years since the Fed promulgated these rules, but Corner Post was harmed by them only recently and has every right to challenge them.”
“Beyond the statute of limitations question, the Fed set the debit card swipe fee cap far too high in the first place and has failed to update it as required by Congress,” Martz continued. “Banks’ costs of processing transactions have fallen dramatically, and these fees continue to drive up costs for merchants and prices for consumers. Retailers are now paying twice as much as they should if the Fed had followed the law. If the Fed isn’t going to act on its own, the courts need to enforce the law.”
A Question of Swipe Fee Caps
The Supreme Court agreed last week to hear an appeal brought by the Corner Post, a Watford City, N.D., truck stop and convenience store that joined the North Dakota Retail Association and the North Dakota Petroleum Marketers Association in a 2021 case brought in U.S. District Court in Bismarck. The case challenged a Federal Reserve cap on debit card swipe fees that took effect in 2011, saying it was set higher than intended by Congress. NRF is not a party, but Martz was initially co-counsel in the case.
The statute of limitations on regulations such as the cap expires after six years. But the lawsuit was filed just short of six years after a 2015 update of the regulations and noted that the Corner Post was not established until 2018. Five federal appeals courts have ruled against the Corner Post, but the 6th U.S. Circuit Court of Appeals recently held that the six-year limit does not start to run until a party is aggrieved.
Failing to Keep Fees Proportional to Costs
The 2010 Durbin Amendment directed the Fed to set regulations resulting in debit card swipe fees that were “reasonable” and also “proportional” to banks’ costs. Congress limited costs the Fed could consider to incremental expenses and the Fed initially proposed a limit of 7-12 cents per transaction. Under pressure from banks, however, it took fixed costs into consideration along with fraud losses, transaction monitoring and network processing fees. The final cap, which applies only to financial institutions with $10 billion or more in assets and took effect in 2011, was set at 21 cents plus 1 cent for fraud prevention and 0.05% for fraud loss recovery.
Since 2011, the Fed has reviewed banks’ costs every two years as required by the legislation but has failed to comply with a requirement that it keep the fees proportional to costs. A Fed survey found bank costs allowed under Durbin averaged 8 cents per transaction as of 2009, meaning the cap was originally almost three times the cost. The Fed’s latest survey showed the average cost at 3.9 cents as of 2019, making the cap more than five times banks’ costs.
Before Durbin, banks charged about 45 cents to process a typical debit transaction, and regulation has saved merchants $9.4 billion a year, according to payments consulting firm CMSPI. A landmark study by economist Richard Shapiro found about 70% of the savings has been passed on to consumers.
Debit and credit card fees are among merchants’ highest costs after labor and drive up prices paid by consumers by over $1,000 a year for the average family. Debit swipe fees totaled $29.6 billion in 2022 and total card processing fees had more than doubled over the past decade to a record $160.7 billion, according to the Nilson Report.