Last week the Federal Reserve Board filed for an appeal of the federal court ruling on July 31, 2013, that the court had misinterpreted the Durbin Amendment to the Dodd-Frank Act that essentially required the Federal Reserve to set prices on the interchange fees for debit card transactions. The suit, initiated by the National Retail Federation and other entities, was based on their interpretation of DFA that the Federal Reserve could use only some of the costs that banks incur when processing debit card transactions.
At stake here is billions of dollars per year, going either to the banking industry or to retailers. To add fuel to the fire, the Federal Reserve Board originally set a rate of 12 cents per transaction in a draft set out for comment. The banking industry and card processers flooded the Federal Reserve with comment letters explaining why the 12-cent level was far too low. Following a review of the comment letters, the Fed reset the rate at 21 cents per transaction. The National Retail Federation and others then filed suit against the Federal Reserve Board, claiming that the Fed did not follow the intent of Congress in setting the rates.
Almost lost in the ruling is an important component that also would require that each debit card require two PIN and two signature card networks available for retailers to choose from. While banks with less than $10 billion in assets are exempt from the rate ceiling, they are not exempt from the network listings. This requirement will basically allow retailers to determine which networks they will work with and, over time, will force all cards to those networks. As to the fee cap not applying to smaller banks, price competition eventually will drive all fees to the same level, so the court decision on July 31 was a huge blow to the banking and card processing industries.
Bankers have stated that they will have to increase other fees on consumers to make up for this lost income, likely causing the end of free checking accounts. Meanwhile retailers so far have failed to demonstrate that they have lowered prices to consumers, as a result of their windfall. In the end, the biggest losers will be the consumers, who are both bank customers and retail customers. They will pay more for bank services, but will not receive a corresponding savings from retail purchases.
The decision by the Federal Reserve Board to appeal this ruling is critical. Both the retailers and the Federal Reserve have asked for an “expedited” decision, meaning that it probably will be mid- to late-2014 before a decision is handed down by the appeals court. However what we should all be worried about – even the retailers – is the ominous precedent being set. That precedent is price fixing by our federal government. Bankers are upset that a law orders a government agency to set prices – in this case for debit cards. I would wager that grocers would not be happy if a law required the U.S. Food and Drug Administration to set a price they could charge for oranges. I am certain that liquor store owners would balk if the Bureau of Alcohol, Tobacco, Firearms and Explosives would set the price they could charge for vodka. The most serious problem with this law is that it sets a dangerous precedent that defies the very principles upon which this country was founded.