Fed Appeals Rejection of Rule on Debit Card Fees

Fed Appeals Rejection of Rule on Debit Card Fees

A fierce legal battle that pits financial firms against the retailing industry took a new turn on Wednesday when the Federal Reserve said it would appeal a recent decision involving debit card transaction fees.

Judge Richard J. Leon of Federal District Court for the District of Columbia shocked banks and companies like Visa and MasterCard last month when he struck down a Fed regulation that governs how much retailers must pay to lenders and other companies when customers swipe their debit cards. The retailers applauded the decision because it could force the Fed, a major banking regulator, to rewrite the rule in such a way that they would pay far less to the banks in debit card fees. Lower fees, in theory, could indirectly benefit consumers, although retailers have no obligation to pass along the savings on debit card fees to customers.

But at a hearing in the court on Wednesday, the Fed’s top lawyer, Scott G. Alvarez, told the judge the central bank would appeal his decision.

The Fed’s move raises a spate of important issues five years after the financial crisis of 2008.

The appeal will be a crucial test of the courts’ power to overturn the financial regulations that stemmed from the sweeping banking overhaul after the crisis. In most instances, the courts have sought to change the new rules in ways that favor banks. But in this case, Judge Leon’s decision could diminish a lucrative revenue stream for banks and others. The Fed’s appeal could also stoke criticism that the central bank makes unnecessary concessions to the banking industry.

“We are very disappointed to see the Fed giving in to the banks,” J. Craig Shearman, an official with the National Retail Federation, an industry group, said in a statement. “The Fed has taken a position that will drag this out while retailers and their customers continue to pay billions of dollars in inflated fees.”

The banks said they supported the Fed’s decision to fight the decision by Judge Leon, who was appointed to the district court by President George W. Bush.

“The Federal Reserve’s decision to appeal is the right thing to do for consumers who value debit cards and the financial institutions that serve them,” Frank Keating, the president of the American Bankers Association, an industry group, said in a statement.

The case stems from the Dodd-Frank Act, which Congress passed in 2010 to overhaul the financial industry. The act contained a section whose intent was to cap the fees retailers pay when customers use debit cards. The Fed was given the task of writing specific regulations based on language in the act.

But in his July 31 opinion, which threw out the Fed’s debit card rule, Judge Leon said the Fed had seen ambiguity in Dodd-Frank where none existed. When setting the fee cap, the Fed made an interpretation of Dodd Frank that was “irreconcilable with the statute,” he wrote.

The judge has suspended his decision to throw out the Fed’s rule while the parties involved decide what to do next.

On Wednesday, Judge Leon suggested that one option for him was to direct the Fed to write a replacement, or interim, rule to satisfy his objections while the appeal continues.

Shannen W. Coffin, a partner at the law firm Steptoe & Johnson who represented the retailers in the case on Wednesday, said there was precedent for a district judge to instruct a federal agency to write a new rule in a situation like this.

Mr. Alvarez, the Fed lawyer, said the agency opposed installing an interim rule during an appeal. Doing so might undermine the Fed’s position during the appeal, Mr. Alvarez said. He also said such a rule might create uncertainty for banks and others.

“The industry would not be aware of what to do,” Mr. Alvarez said. “Nor would the merchants.”

Retailers now pay roughly 21 cents a transaction on debit card purchases. When the Fed introduced its rule that set the fee around that level, it was considered a blow to the banks, because debit fees had been around 48 cents a transaction. The rule reduced debit fee revenue at banks, though it is not clear how much profit from this business has been dented.

Still, the retailers opposed the Fed’s cap because they felt the language in the Dodd-Frank Act should have produced even lower fees.

When the Fed proposed its rules, it made an interpretation that would have capped the fee at 12 cents. In increasing the cap to 21 cents in the final rule, the Fed considered some costs related to debit cards.

Judge Leon objected to the inclusion of these costs. He said the bill did not permit the Fed’s approach.

On Wednesday, it became clear that there was a potential outcome from the case that retailers would particularly want to avoid. If the Fed’s current rule ceases to have effect because of Judge Leon’s actions and the Fed puts nothing in its place, the banks would theoretically be free to increase fees above 21 cents a transaction. Representatives for both the banks and retailers said they favored a continuation of the 21-cent status quo while the case plays out.

Still, Judge Leon seemed concerned that the appeals process could take too long. He asked Mr. Alvarez to file briefs by Aug. 28 that would include arguments why the district court did not have the authority to direct the Fed to write a replacement debit fee rule.

Investors in credit card processors seemed to view the Fed’s move favorably. Visa’s share price rose 3 percent to close at $ 178.39 on a day when the broader markets were lower. MasterCard, however, closed down 0.5 percent at $ 619.31.



Leave a Reply

Your email address will not be published.