Federal Reserve Overstepped Bounds By Catering To Banks & Ignoring Congress

In a Washington, DC federal courthouse this week, lawyers for merchants made a convincing argument that the Federal Reserve overstepped its bounds by catering to banks instead of doing what Congress instructed in legislation reforming debit card swipe fees.

Congress, they told the court, was clear about setting reasonable debit swipe fees and ensuring greater competition among card networks. It’s also clear that the Fed ignored Congress.

Fees charged to swipe both debit and credit cards for purchases total about $60 billion in revenues for banks and credit card companies, costing U.S. households hundreds of dollars a year. For merchants, swipe fees are the second highest cost for them, after labor. Swipe fees also have tripled since 2004, even while technology has lowered the cost of card transactions.

Part of the Dodd-Frank law included the Durbin Amendment, which sought to bring competition to debit card networks that process the transaction and to reduce the fees for using debit. The amendment instructed the Fed to set debit swipe fees that are “reasonable” and “proportional” to the banks’ costs. The Fed had determined the cost to be 5 cents a swipe.

After Durbin passed, the Fed dropped debit swipe fees from an average 42 cents a transaction (over 10 times actual cost) to 12 cents. The big banks, however, immediately leaned on the Fed, forcing their regulator to set the debit swipe fees at 21 cents, five times the banks’ actual cost, plus .05 percent of the transaction and an additional one cent for fraud prevention.

The banking lobbying convinced the Fed to cram the many costs of running a bank into an overinflated fee, rather than focusing on the banks’ cost of handling a debit transaction. The Fed also undercut Congress’ intent to make the debit card industry more competitive by not allowing merchants to choose among networks to process a sale.

As a result, consumers and merchants have not realized the savings they could have, and fees have actually increased for debit card purchases less than $15.

In too many instances, swipe fees eat up a merchants’ profit.

The Food Marketing Institute, National Association of Convenience Stores, National Restaurant Association and National Retail Federation filed the suit challenging the Federal Reserve’s rules. All of them are members of the Merchants Payments Coalition, a group of retailers and merchants who are concerned about the rising costs of swipe fees on both debit and credit cards. The MPC continues to push for credit card reform, in addition to correcting the implementation of the Durbin Amendment, which went into effect a year ago on October 1, 2011.

Visa and MasterCard together control 80% of the credit card market allowing them to dictate the amount of swipe fees that their member banks charge for each purchase. This kind of price-fixing is not allowed in other parts of the economy. The swipe fee rate varies card by card so a merchant never knows what the fee will be for any specific transaction. Visa has over 70 swipe fee categories while MasterCard has over 240. The fees also are 7 to 8 time higher than the standard European rate.

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