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NRF Lawyers Tell Judge Federal Reserve Set Debit Swipe Fees Too High

By J. Craig Shearman
Washington Retail Insight
October 2, 2012

NRF told a judge today that the Federal Reserve overstepped its authority in writing regulations to implement a 2010 swipe fee reform law, resulting in a cap on debit card fees that is twice as high as it should be.

Attorneys for retailers, banks and the Fed appeared before U.S. District Court Judge Richard Leon in Washington this morning for oral arguments on summary judgment motions in a lawsuit filed against the Fed last year by NRF, the Food Marketing Institute, the National Association of Convenience Stores and the National Restaurant Association. Leon did not issue a ruling, but promised to do so “in the not-too-distant future.”

Under the 2010 law, the Fed was required to set guidelines that would result in swipe fees that are “reasonable” and “proportional” to banks’ actual costs of processing debit card transactions. The law said the Fed could consider the “incremental” costs of acquiring, clearing and settling each transaction but specifically prohibited any other expenses from being considered. The lawsuit contends that the Fed, which was heavily lobbied by banks and card industry, included costs that were barred.

While the Fed initially determined that the allowable costs averaged 4 cents per transaction and proposed a cap of not more than 12 cents, the final regulations that took effect on October 1, 2011, set a higher and more complicated cap of 21 cents plus 0.05 percent of the transaction and, in most cases, an additional 1 cent for fraud prevention.

Arguments in court today turned on whether the language written by Congress was sufficiently precise and the extent, if any, to which the Fed had room to interpret the language.

Federal Reserve Board Associate General Counsel Katherine Wheatley said federal agencies are routinely called upon to work out details of legislation passed by Congress.

“What Congress said was that we are going to rely on the Board to follow our broad guidelines and that those broad guidelines are ‘reasonable’ and ‘proportional,’ ’’ Wheatley said. “Congress didn’t want to have to figure it out. They said the Board could figure it out.”

But attorney Shannen Coffin, representing NRF and the other retail groups, said the Fed essentially rewrote the congressional language, and that the jump from 12 cents to 21 cents illustrated the extent of the over-interpretation.

“Rather than filling in the gaps, they are seeking to substitute their own judgment for the judgment of Congress,” Coffin said. “We’re not saying the Board can’t change their mind. But the Board can’t change the statute.”

A key point was what Congress meant by “incremental,” with retailers contending that none of the fixed costs in processing debit transactions such as computer hardware and other equipment should be allowed. But Wheatley argued that some fixed costs should be included, citing the cost of adding a computer server, for example, if an increase in transactions exceeded the capacity of existing equipment.

Coffin said the including fixed costs “ignores the plain language of the statute.”

The banking industry was represented by former Clinton Administration Solicitor General Seth Waxman, who argued that the Fed had set the cap too low and said any move to lower the cap “would greatly exacerbate the Board’s error.”

© 2012 National Retail Federation

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