By Claude Solnik
The Daily Record Newswire
LONG ISLAND — A federal judge has struck down a government cap on the fees banks can charge merchants for handling debit card purchases, saying the Federal Reserve should set it even lower.
The U.S. District Court ruling is a victory for a coalition of retail groups that sued over the new cap, which the Fed lowered from an average 44 cents per debit card transaction to 24 cents.
The Fed had initially set the rate at 12 cents, but caved in to pressure from the banking lobby, the coalition alleged.
Banks are expected to appeal the ruling, which could take billions from their coffers, while boosting retailer profits.
A study by Card Hub concluded the 2011 cap cost banks $8.4 billion annually, with bigger banks absorbing about $8 billion of the total. But the umbrella of national organizations still sued, saying the limits were too high.
U.S. District Attorney Court Judge Richard Leon agreed, citing requirements by the Durbin Amendment that such rates be “reasonable” and “proportional” to transaction costs.
Banks, naturally, disagree with that opinion. American Bankers Association CEO Frank Keating said such “price controls” would only “further line the pockets of our nation’s big-box retailers” and lead to “disastrous consequences for the institutions affected and the communities they serve.”
Retailers see things differently, noting that as the trend of purchasing with debit cards caught on, they were footing the bill.
“The final Federal Reserve rules on the implementation of the Durbin Amendment were flawed,” said Lyle Beckwith, senior vice president of the National Association of Convenience Stores. “By following the law and using their own data, the Fed should produce a debit card rule that lowers these outrageous fees paid by merchants and, ultimately, consumers.”
Assistant Majority Leader Dick Durbin, D-Illinois, who filed an amicus brief on behalf of retailers, said the Federal Reserve didn’t go far enough in 2011.
The Durbin Amendment namesake said Leon’s ruling will benefit consumers and small businesses by lowering swipe fees for billions of debit-card transactions.
Retailers are on board. “I think that’s great,” said Joanne Wilson, owner of California Cactus Café in Bohemia. “It should be lower.”
Aside from determining how many pennies a debit-card swipe should generate, some insiders sense a bigger issue: whether the federal government and the federal bench are pushing the oversight envelope.
“Regulation in terms of knowing what you’re doing, having the correct procedures in place to not cause a bank to fail, is different from saying you can only charge 10 cents or 50 cents a time,” said Art Loomis, president of Latham-based banking consulting firm Northeast Capital. “I don’t think Detroit would like it if somebody said you can only charge X for a car. I see it
very clearly as precedent.”
Loomis said banks could make up lost income by increasing other fees or chipping away at — or even eliminating — free services, citing potential impacts on free checking and “anything the bank feels is a headache for which they’re not being adequately compensated.”
In some cases, it’s already happening. Many banks have already modified “free” checking programs by requiring higher minimum balances, for instance.
While the new limits apply only to banks with at least $10 billion in assets — including larger community banks, such as Lake Success-based Astoria Financial and Westbury-based New
York Community Bancorp — Loomis said smaller banks would feel a ripple effect.
“The smaller banks aren’t going to be competitive against larger banks,” he noted, forcing them to reduce their own swipe charges or risk losing business.
Some smaller community banks, however, said the swipe-fees battle won’t impact them much, since they obtain relatively little income from such revenue streams.
“We don’t have a whole lot of cardage out there,” noted Doug Manditch, CEO of Islandia-based Empire National Bank. “But it affected big banks by billions of dollars, and it will do that again, if they cut fees even more.”
The effects on retailers, while positive, will also be tempered by the fact that the Durbin Amendment and the District Court ruling do not affect credit cards.
Credit card purchases generate several fees not addressed by the legislation — higher fees for transactions through cards that offer a points-reward system, for instance — and once again it’s the retailer who ultimately pays the price, according to Wilson at the California Cactus Café.
“We pay extra fees for those,” the restaurateur said. “And it isn’t just money for the swipes. We pay for the terminal.”
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