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Capital Markets

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Categorized | Financial

Banks hit by debit card cap fee ruling

Posted on July 31, 2013

The Federal Reserve was criticised on Wednesday for being too soft on the financial industry after a judge ruled that limits on debit card fees charged to retailers were not tough enough.

Richard Leon, a district judge, found that a cap on “interchange fees” paid by retailers on debit card transactions had been set too high and should be lowered, in a decision that the American Bankers Association warned would have “disastrous consequences” for the banks.

    Visa shares fell more than 10 per cent immediately after the ruling.

    US Congress introduced the limit in 2010 and told the Fed to set the cap at an appropriate level. The original provision was fiercely opposed by the banks, which have since suffered a multibillion-dollar hit to revenues.

    But retailers said the cap had been set too high and Judge Leon agreed on Wednesday. He said the Fed had taken account of too many costs when setting the cap, including that of dealing with fraud, and it should be lowered.

    Dick Durbin, the Democratic senator who sponsored the cap, celebrated the court’s decision. He attacked the Fed for being too soft in its original “decision to bend to the lobbying by the big banks and card giants”.

    A spokesperson for the Fed said it was “reviewing the judge’s opinion”.

    The ABA said it was “deeply disappointed” and attacked the “price controls” as “further lining the pockets of our nation’s big-box retailers at their own customers’ expense”. The ABA said the Fed should deploy “all legal means” to fight the decision.

    MasterCard, which is less reliant than Visa on debit cards and which reported improved results on Wednesday, fell more than 4 per cent following the ruling, but closed up 1.5 per cent in New York. Visa closed down 7.5 per cent.

    The Fed had argued that it was free to consider costs not specifically banned by the law.

    “Not quite!” wrote the judge at the district court in Washington. “If I were to accept the Board’s argument, then every term in the statute would have to be specifically defined or otherwise be deemed ambiguous. This result makes no sense, and more importantly, it is not the law.”

    He found the Fed’s interpretation of the law “utterly indefensible” and said it had “shoehorned a whole array of excluded costs into the interchange fee standard”.

    The case was brought by a collection of retailers and trade associations, including NACS, the convenience store lobby group, and the National Retail Federation.

    Banks have considered introducing fees to consumers to make up for the revenue shortfall but both Bank of America and Wells Fargo have dropped the idea amid fears of a consumer backlash.

    Alan Greenspan, the former Fed chairman, has criticised the limit as an undue interference in free markets.

    The court ruling comes as the European Commission takes aim at fees with its own caps. MasterCard has argued that the “coerced reduction of interchange fees” in various countries has backfired, with cards becoming more expensive while retail prices barely change. In Australia, “the merchant pocketed the reduction”, it argued to the commission.

    The payments network reported a 19 per cent year-on-year increase in second-quarter net income to $848m on Wednesday on revenue that rose 15.2 per cent to $2.1bn.