Retailers Tell Fed: Debit Card Swipe Fees Are Still Too Dang High

Image courtesy of Mike Mozart

Even though the Dodd-Frank financial reforms effectively halved the fees that retailers must pay to banks for each debit card transaction, the stores say that amount is still too much. And with all of their legal options exhausted, the retail industry is calling on the Federal Reserve to re-think the cap it put in place nearly five years ago.

For background: Before Dodd-Frank, the average debit card swipe fee paid by a retailer was around $.44 per transaction. While the financial reform law directed the Fed to set a maximum limit on swipe fees that was based on the actual costs of processing these payments, it didn’t specify a number.

The Fed initially proposed slashing swipe fees to a maximum of $.12/transaction, but the banking industry threw a fit, resulting in a compromise fee ceiling of $.21/transaction that went into effect in the fall of 2011, plus .05% percent of the transaction (for fraud recovery) and up to $.01 for fraud prevention. Thus, in reality the average swipe fee now comes in closer to $.24.

The retail industry sued, alleging that the Fed had disregarded Congress’ intention with the new law, and in 2013 a U.S. District Court judge agreed, saying that Federal Reserve Board was “inappropriately inflating all debit card transaction fees by billions of dollars.”

But then in 2014, a federal appeals court overturned the lower court ruling, noting that “Congress directed the Board to issue rules that would accomplish a particular objective, leaving it to the Board to decide how best to do so, and the Board’s rule seems to comply perfectly with Congress’s command.”

The industry petitioned the Supreme Court to hear its case, but in Jan. 2015, SCOTUS denied that petition without comment.

In a letter [PDF] from the National Retail Federation to the Fed Board of Governors, the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Commission, retailers admit that there have undoubtedly been benefits from the lower swipe fees, but that the current level is “substantially higher than issuers’ incremental costs.”

The letter contends that the Fed is allowing banks to reap too high a profit margin from a retail industry where it says profits range in the 1-4% area. “The extremely comfortable return provided issuers… makes risk-taking less rewarding,” argues the NRF, which is asking the Fed to take another look at the swipe fee numbers in the hopes of having them revised downward.

If the Fed doesn’t lower the swipe fee ceiling, the NRF argues that it should at least reconsider the fraud recovery and prevention costs that can add a few cents to each transaction.

With retailers who haven’t fully switched over to the more secure chip-and-PIN cards now facing more liability for fraudulent card transactions, the NRF says that the banks “may no longer have a legitimate basis” for tacking on these costs.

The only way for retailers to put that liability burden back on the financial institutions is to update their payment systems, but the NRF claims that the current delay is due to hardware not being available, and the wait to get their networks certified. Additionally, gas station pumps — a popular place to pay with plastic — won’t be required to go through the upgrade process until 2017.

“Indeed, the Canadian transition, involving a population of merchants a fraction the size of that in the U.S., took nearly ten years and included a delay,” reads the letter. “In light of this change, the current fraud allowance is ripe for revisiting by the Board.”