Organizations representing restaurants, retailers and gas stations joined a lawsuit against the Federal Reserve that challenges debit card transaction fee limits required under recent federal legislation. According to court documents filed this month, lead plaintiff NACS (formerly the National Association of Convenience Stores) asserts that the specific rules implemented by the Fed fail to adhere to language set forth in the Durbin Amendment to the Dodd-Frank Financial Reform Act. That law requires banks to set "reasonable and proportional" rates to cover the cost of electronic transactions and fraud prevention, but left the Fed in charge of choosing those rates.
The battle over debit card transaction fees after Dodd-Frank's passage pitted banks against merchants, who claimed that percentage-based transaction fees on debit card purchases left many smaller retailers in the red on common grocery, fast food and gasoline purchases. Merchants cheered an early Fed proposal to cap rates at 12 cents per transaction.
Interchange fee cap targets bank profits, rewards programs
However, a year of lobbying efforts led the Fed governors to split the difference, setting the limit at 21 cents, plus a small percentage to help offset fraud prevention costs. NACS court documents cite the Fed's intentions to help banks cover the cost of electronic payment networks and loss prevention systems, while preventing merchants from paying for cash back rewards and other cardholder perks.
Despite reducing the rate from the previous average of 44 cents, the Fed's ruling caused unintended consequences. Some merchant processing networks had offered special discount rates for small purchases at convenience stores and fast food restaurants, managing debit card transactions for as little as 8 cents. Those discounts largely disappeared as networks met in the middle, resulting in higher costs for many NACS members.
In their court filing, NACS, the National Retail Federation and the Food Marketing Institute allege that the Fed ignored the Durbin Amendment's intent when they reclassified debit transactions into a single category. In a statement to Bloomberg BusinessWeek, Electronic Payments Coalition spokeswoman Trish Wexler suggested that many retailers want banks to cover the full cost of debit card transactions. The U.S. District Court in Washington has not yet set a timetable for the lawsuit.