Court rules in favor of retailers on debit card fee cap

The banking industry stands to lose a lot of money on the decision.

By Benzinga Aug 1, 2013 3:06PM
copyright Image Source, Getty ImagesBy Jim Probasco

In a ruling viewed as a major victory for retailers, U.S. District Judge Richard Leon on Wednesday overturned a Federal Reserve rule placing a cap on debit card fees banks collect from merchants, according to the Washington Post.

Retailers had complained that the Federal Reserve had set the cap too high following intense lobbying by banks, and the judge agreed. Under the Fed rule, banks could charge as much as 21 cents per debit card transaction. Retailers pointed out that the Fed had originally proposed a 12 cent per transaction cap.

By the time the final rule was enacted, it covered additional items including the cost of equipment and technology designed to prevent fraud. The court ruled that this action by the Fed was improper.

Retailers argued that consumers would benefit from a lower fee since costs like these are often passed on by merchants in the form of higher prices.

Ironically, as Reuters pointed out, the cap on debit card fees, also known as the Durbin amendment to Dodd-Frank and named for its sponsor, Senator Richard Durbin of Illinois, was intended to help consumers in the first place.

What happened, as so often is the case in Washington, was lobbying -- in this instance by the banking industry.

Following Wednesday's ruling the banking industry expressed disappointment, urged the Federal Reserve to appeal the decision, and added that merchants are unlikely to reward consumers with lower prices and will simply opt to increase their profits.

The Merchants Payments Coalition, a retailing group, on the other hand said that Wednesday's ruling "will give relief to merchants across the country and their customers, putting a stop to unconscionable price gouging that is completely at odds with the law," according to the Washington Post.

While retailers are the big winners, banks and credit card issuers stand to have swiping fees cut more than 50% down to as low as 7 cents per transaction, according to a note to investors from Guggenheim Partners.

Because of the ruling, shares of the two largest operators, Visa Inc. (V) and MasterCard Inc. (MA), plunged Wednesday. Visa stock fell 11% and MasterCard dropped 6%, but recovered to end slightly higher at the close of trading. American Express Co (AXP) dropped 1.9% Wednesday and Discover Financial Services (DFS) fell 1.3% in late trading.

The 21-cent cap, Reuters reported, will probably remain in place until the Fed either rewrites the rule or decides to appeal. Barbara Hagenbaugh, a Federal Reserve representative, indicated that the agency was in the process of reviewing the judge's ruling.

More from Benzinga

Aug 1, 2013 3:59PM
This is yesterday's news.  What took you more than 24 hours to put this on the news.  MSN money is getting slow & old.
Aug 1, 2013 8:02PM
It is always banks vs businesses. The only losers here are the people buying products to sustain life.  then as a rule of thumb, everyone who uses a debit card now, should stat using checks for purchases to avois the fees passed to all of us by banks and businesses. The really losers are those people who pay cash. Who gives them a break for ready money in the cash register?
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