Judge rejects cap on debit-card transaction fees

A Federal Reserve cap on fees charged for processing debit-card transactions has been tossed out by a federal judge in Washington, who agreed with retailers that the Fed went too easy on big banks in 2011 when it set the limit.

The ruling Wednesday is the latest twist in a bitter battle between retailers and banks over fees that most consumers are unaware of – but are charged to merchants each time a customer swipes a debit card at a check-out counter.

Retailers cheered the decision by U.S. District Judge Richard Leon and banks decried it. The Fed didn’t disclose whether it would appeal the ruling, saying only: “We are reviewing the judge’s opinion.”

Leon held off putting his ruling into effect pending a hearing Aug. 14, but left little doubt where he stood in the dispute.

“The Court concludes that the (Federal Reserve) Board has clearly disregarded Congress’ statutory intent by inappropriately inflating all debit card transaction fees by billions of dollars,” Leon wrote.

The Fed’s staff recommended cutting the fee from 44 cents per transaction on average to just 12 cents. But after heated protests from the financial industry, the Fed in June 2011 set a cap of 21 cents per transaction. It has been held at that level since October 2011.

Groups representing retailers said Leon’s decision was a boon for consumers since merchants pass along debit processing fees invisibly by raising prices for purchases however they are made.

The National Retail Federation, a plaintiff in the lawsuit, said the central bank had disregarded Congress’ requirement that fees be “proportional” to debit transaction costs. The Fed “grossly misapplied the swipe fee law,” Mallory Duncan, senior vice president of the trade association, said in a statement.