WASHINGTON - The Federal Reserve disregarded the Congress's intent in deciding how much banks can charge merchants for debit-card transactions, a judge ruled, handing a victory to retailers who challenged the fees as being too high.
U.S. District Judge Richard Leon in Washington ruled Wednesday that the Fed considered data it wasn't allowed to use in setting a 21-cent cap on debit-card transaction fees under the Dodd- Frank law. Leon said the rule, in effect since October 2011, would remain in place until the Fed drafts new regulations or interim standards.
"The board has clearly disregarded Congress's statutory intent by inappropriately inflating all debit card transaction fees by billions of dollars and failing to provide merchants with multiple unaffiliated networks for each debit card transaction," Leon said in his ruling.
The decision, unless overturned on appeal, will force regulators to revisit rules that bankers said would cost them 45 percent of their swipe-fee revenue. Lenders collected about $16 billion annually from those fees before the Fed's regulation and responded by cutting back on perks such as rewards programs and free checking to soften the blow to their profits.
"This is clearly saying 21 cents may be too much," said Nancy Bush, an analyst at SNL Financial LC, a bank research firm in Charlottesville, Va. "You'll have to go back to the drawing board and figure out how much a debit-card transaction actually costs and is there going to be some kind of premium paid to that."
More than 38 billion debit-card transactions took place in 2009 at retailers that include grocery and electronics stores, gas stations and large chains such as Wal-Mart Stores and Target, all of whom lobbied for limits on the power of banks and payment networks to impose fees.
Swipe, or interchange, fees are set by Visa and MasterCard., the biggest electronic-payment networks, which collect the money and remit it to card-issuing member banks.
Visa, the biggest bank-card network, fell less than 1 percent in New York trading to $189.88 at 10:48 a.m. MasterCard, the No. 2 network, rose 2.7 percent to $617.47 after reporting today that second-quarter profit beat analysts' estimates.
James Issokson, a spokesman for Purchase, N.Y.-based MasterCard, had no immediate comment on the ruling. Barbara Hagenbaugh, a spokeswoman for the Fed, didn't immediately respond to a phone message seeking comment.
The retailer groups, in a lawsuit filed in November 2011, said merchants would be "substantially harmed" by the fees the Fed set under an amendment to Dodd-Frank pushed by Senator Dick Durbin, the Illinois Democrat.
"The board's final rule permits banks to recover significantly more costs than permitted by the plain language of the Durbin Amendment and deprives plaintiffs of the benefits of the statute's anti-exclusivity provisions," the retailers argued in their complaint.