• by Thom Forbes  @tforbes, August 1, 2013

Retailers say consumers will be the true beneficiaries of a federal court decision yesterday that ruled that the Board of Governors of the Federal Reserve System had been far too generous to banks in the amount it had allowed them to take as its rake from each swipe of a debit card. Well, ironically, maybe not the denizens of the Elmore Store in Elmore, Vt., where, the Wall Street Journal reports, proprietor Kathy Miller “has given away cups of coffee to customers because it is better for her bottom line than swiping their debit cards.” 

“You're talking $800 a month in fees, that's huge, that's salaries,” Miller tells one member of a veritable team of WSJ reporters -- led by Alan Zibel Brent Kendall and Michael R. Crittenden -- swarming the story this morning. “The pie is only so big and the slices keep getting smaller and smaller because of fees like this,” she claims. 

Miller had previously testified in Congress in favor of fee limits, and that’s where our saga begins back in 2010 when the Dodd-Frank law was passed. One of its provisions, sponsored by Democratic Sen. Richard Durbin of Illinois, was to set a cap on the fee that banks could charge retailers for using their debit services. It left it up to the Fed, which regulates banks, to come up with a fair amount. 

“The so-called Durbin amendment … was intended to reduce burdens on retailers and hopefully trickle down to consumers in the form of lower prices,” explains Reuters’ Emily Stephenson.

In his ruling yesterday, District of Columbia District Court Judge Richard Leon agreed with groups such as the National Retail Federation who felt that the Fed had done a pretty poor job of it.

“In a strongly worded decision,” Katerina Sokou writes in the Washington Post, Leon said the Fed “had not properly interpreted” the law, writing that its rule "'runs completely afoul of the text, design and purpose' of the Durbin amendment to limit the fees to the actual cost of processing debit card transactions.”

Durbin feels the same way himself, saying, “Today’s decision by the Federal District Court is a victory for consumers and small business around the country and will lead to lower interchange rates for billions of debit card transactions each year. The Fed’s 2011 decision to bend to the lobbying by the big banks and card giants cost small business and consumers tens of billions of dollars and did not do enough to rein in the anti-competitive, anti-consumer practices of Visa and MasterCard.” 

Naturally, bankers felt otherwise.

“The price controls enacted as a result of the Durbin Amendment served one purpose -- further lining the pockets of our nation’s big-box retailers at their own customers’ expense,” American Bankers Association president and CEO Frank Keating said in a statement. “It was -– and still is -– all about trying to help retailers increase profit margins while providing no real benefit to consumers.”

The Los Angeles Times’ E. Scott Reckard reports that “small banks and credit unions, which had been exempted from the fee cap,” also criticized the decision. “As it stands, the Court's ruling will have an irreparable, detrimental impact on credit unions' ability to ensure their members receive the services they need,” the National Association of Federal Credit Unions said.

The Consumer Bankers Association, which represents large U.S. banks and regional banks, also weighed in. “Congress ought to save families from this uncertainty by repealing this government-mandated price fixing” said president and CEO Richard Hunt in a statement quoted by the AP. “We certainly hope retailers return to their free-market principles as they did when opposing the proposed government ban on big gulp sodas in New York.”

Before the Fed set the cap in 2011, “the average swipe fee was around $.44 per debit card transaction,” Chris Morran writes on Consumerist.com. “After studying the costs associated with the process, the Fed initially proposed slashing the fee to a maximum of $.12, which caused outrage by the banking industry, as it stood to lose billions of dollars a year in revenue.”

The Fed wound up capping the fee at $.21. Its response yesterday was that it was “reviewing the judge's opinion.”

Mallory Duncan, SVP and general counsel for the National Retail Federation, has been maintaining all along that merchants would pass along the saving to consumers, saying that the Fed “failed to heed Congress’ call to set fee standards that were ‘reasonable’ and ‘proportional’ to the actual cost of a transaction.”

“On Wednesday, Mr. Duncan said customers had already seen benefits,” according to the New York Times’ Peter Eavis. “‘You see gas stations offering savings for cash and for debit. Nobody’s margins are going up right now.’

But Leon is delaying putting the order into effect and has scheduled a hearing for Aug. 14 to decide on how to proceed, Eavis reports.

Let the lobbying resume.