The Federal Reserve Board plans to appeal a recent district court’s decision that rolled back the 21-cent swipe fee that’s been the bane of bankers and retailers alike – albeit for different reasons.
While retailers have long contended that reduced swipe fees would allow them to pass on the savings to consumers, bankers have countered that this is largely a merchant-driven campaign and the interchange cap does not account for costs like providing the debit card in the first place.
Community bankers, who are ostensibly exempt from the cap to begin with, are still miffed at the debate. The Independent Community Bankers of America applauded the Fed’s decision to appeal and called the district court’s ruling “a disaster for consumers and the community banks that serve them.”
Gregory Shook, president of Essex Savings Bank, characterized the interchange cap as rebate to merchants and said the interchange cap did not properly account for the costs associated with fraud, which banks eat more often than not.
“That was a huge piece of what they forgot in the original legislation,” he said.
Originally, the Fed proposed capping interchange fees at 12 cents, but later it capped them at 21 cents, plus five basis points, plus one cent for fraud prevention where eligible.
But late in July, Judge Richard Leon of the U.S. District Court for the District of Columbia ruled in response to a suit brought by a coalition of retail trade associations that the Fed had ignored Congress’s intentions when it capped interchange fees at 21 cents and ordered the Fed to come up with a more appropriate and proportional cap.
Two weeks later, in an Aug. 14 hearing, Leon excoriated the Federal Reserve Board for its sluggishness to move on interchange fees or lower caps in the interim while it worked out a final rule.
He said during that hearing that the Fed needed to “rule expeditiously” and added, “We’re not putting a man on the moon here.”
Leon then went a step further, suggesting that lawyers from both sides of the case figure out how the financial services industry might reimburse retailers for what he characterized as “overcharges.” While Leon could not put an exact number to that figure, it could run into the billions, if accounting for the difference between the original 12-cent interchange cap the Fed suggested and the 21-cent cap it implemented since October 2011.
It’s unlikely financial institutions will have to actually pay, said Viveca Y. Ware, executive vice president, regulatory policy for the ICBA.
For one thing, banks were never a party to the lawsuit, she said. For another, retailers never claimed damages in their original suit.
The National Retail Federation never asked for that money, said J. Craig Shearman, the organization’s vice president for government affairs and public relations, but “it would certainly be welcome and appropriate.”
Pressure On Community Banks
Shearman contended the debate should not touch community banks at all. After all, the Fed’s interchange cap applies only to financial institutions with more than $10 billion in assets.
“The law was absolutely crystal clear that banks under $10 billion in assets are not to be covered by this law. They are not affected in any way whatsoever,” he said.
But that’s beside the point, community bank advocates argue.
“If the interchange cap falls to 12 cents, as was originally proposed, then you’re talking about a 31-cent gap between exempt and non-exempt issuers,” Ware said. “Merchants are going to pressure the networks to lower the interchange fees for community banks as well.”
“It’s unrealistic to expect retailers to pay one price to some financial institutions and another price to others,” she said.
And while merchants argue that it doesn’t cost banks 21 cents (plus five basis points, plus a one-cent fraud-prevention adjustment in some cases, of course) to move money from the consumer’s checking account to the retailer, the interchange revenue banks receive allows them to assume a myriad of costs associated with providing that convenience to their customers.
The still-nascent data paint a mixed picture for smaller banks. A study out of the Fed last year showed that exempt issuers saw a 4 percent decline in average interchange fees during the fourth quarter of 2011, when the caps took effect. Earlier this year, the Fed said the exemption was working and that smaller institutions received fee revenue averaging about 43 cents per transaction, the same amount they averaged during the previous study.
However, a recent study from PULSE Network showed that non-exempt issuers also saw an average rate decrease of 2 cents for both PIN and signature transactions. One in three exempt issuers surveyed in that study said they anticipated further declines in debit interchange.
Email: lalix@thewarrengroup.com
