Retail Groups Sue Federal Reserve Over Debit-Fee Rules

WASHINGTON — Three industry associations, including Food Marketing Institute, filed a lawsuit in federal court here last week saying the Federal Reserve failed to follow the requirements of last year's sweeping financial reforms when it set a cap on debit-card interchange fees this year.

“FMI's members will suffer significant and irreparable monetary injury directly traceable to the Board's misconstruction of the statute,” George Green, FMI general counsel, said in a statement. “The bottom line is that we are fighting back against a rule that ignores the clear language in the law and will put more money in the pockets of the big banks at the expense of retailers and their customers.”

Also filing with FMI were National Retail Federation, NACS — formerly the National Association of Convenience Stores — and two retailers: Boscov's Department Store, Reading, Pa.; and Miller Oil Co., Norfolk, Va.

The groups say the Reserve Board's rules “have allowed big banks to continue charging unjustifiably high swipe fees” and are discouraging price competition among credit card networks, contrary to the requirements of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. The new regulations, which include capping debt-card fees at 21 cents per transaction plus 0.5% of the transaction cost and a 1-cent fraud-prevention fee (in most cases), took effect Oct. 1.

The lawsuit alleges that the Fed — under pressure from the banks and card industry — included costs in that calculation that were barred by the law. “Doing so has deprived merchants and their customers of the full extent of the swipe fee relief to which they were entitled,” NRF said in a statement.

“The proposed rules followed the law, but the Federal Reserve Board changed its view of the law mid-course and without justification when issuing the final rules,” said Doug Kantor, a partner at the Washington law firm of Steptoe & Johnson and lead counsel in the lawsuit.

The suit also alleges that the Fed's final rules discourage competition among debit-card networks. In order to establish a competitive market between networks, which include NYCE, Pulse and Plus as well as the Visa and MasterCard networks, the law required that merchants be given a choice of two networks on every transaction.

However, NRF said that the Fed's final regulations allow banks to limit their cards so that merchants may never have a choice of networks.

“The lack of competition will allow the dominant networks to continue increasing their fees,” the association said.

The Merchants Payments Coalition, which encompasses several retail groups and has been pursuing credit- and debit-card fee reform for several years, issued a statement saying that it “strongly supports the goals” of the lawsuit, and will “continue to seek fairness and transparency in the payments market by pursuing action on credit-card swipe fees.”

A spokesperson for the Federal Reserve could not be reached for comment.

A spokeswoman for the Electronic Payments Coalition was quoted as saying, “Retailers won't truly be happy until they pay zero to accept cards.”