The financial industry was stunned last summer when the Federal Reserve handed down a rule that effectively halved the amount banks could charge stores every time one of their customers swiped a debit card at a checkout terminal. So why is a trade group representing retail merchants now suing the Fed for its decision? Retail trade groups were never really happy with the Fed’s decree on debit interchange fees, which set the maximum “swipe fee” at 21 to 24 cents, because the agency had initially suggested a cap of 12 cents back in December 2010. Retail interests said even 12 cents was way too high, banks said it was way too low, and the Fed settled on a compromise that didn’t satisfy either group.
“[T]he Fed didn’t follow the law, so everyone’s fees are higher than they should be,” National Retail Federation general counsel Mallory Duncan told the New York Times, explaining why the NRF, along with the Food Marketing Institute, the National Association of Convenience Stores and two retailers filed suit against the Fed in federal court. The issue, according to Duncan, is the fraction of a penny per transaction that banks can charge to recover fraud losses.
At the time of the Fed’s decision, banks claimed that the legislation would force them to start doing things like charging customers for using their debit cards. After that idea went over like a proverbial lead balloon, banks turned to other tactics. Some institutions have raised other kinds of customer fees, such as monthly charges for account maintenance, to make up for the decrease in revenue. (President Obama took banks to task during the debit-fee flap, saying, “You don’t have some inherent right just to, you know, get a certain amount of profit.”)
Banks, meanwhile, turned the Fed’s 21-cent cap on its head, declaring it a floor as well as a ceiling. Before the change, fees were charged on sliding scale depending on the size of the transaction, so merchants paid about 12 cents on a $5 purchase and about 44 cents on a $35 purchase. Now, they only have to pay 21 cents for that $35 purchase, but they also have to pay 21 cents for small purchases. This has hurt merchants that typically process small transactions, such as convenience stores and fast-food restaurants, according to the NRF.
Retailers say high swipe fees contribute to high prices, and lower fees mean that merchants can pass along those savings to consumers. The trouble is, research has not confirmed this assertion. Consumers, meanwhile, are mere pawns in this battle between two industries.