Banks' Victory on Swipe Fees Seems Likely to Hold Up

The banking industry's victory on debit card interchange fees seems likely to be the decisive turn in a high-stakes legal dispute with retailers.

A three-judge panel ruled Friday that the existing price caps and rules on competition should largely remain in place, turning back a challenge by retailers who argued that swipe fees are still too lucrative for banks.

The merchants can appeal the decision to the entire federal appeals court for the District of Columbia, or to the U.S. Supreme Court. "We're still considering what next steps make the most sense," said Doug Kantor, a lawyer who represents the retailers.

But financial industry analysts expressed doubt that the merchants — if they do choose to pursue the fight further — will find success.

"There's really nowhere else to go," said Jaret Seiberg, an analyst at Guggenheim Securities. "It's hard to believe that the Supreme Court would want to hear a case like this. And Congress has close to zero interest in wading back into debit interchange. So this should be the end of the line."

Edward Mills, a policy analyst at FBR Capital Markets, agreed: "This is probably the end of the case."

The appeals court ruling overturned a decision from last July by U.S. District Judge Richard Leon.

That ruling — which likely would have cost banks billions of dollars in annual revenue, on top of the more than $6 billion the industry has already lost since swipe fee restrictions went into effect in 2011 — was put on hold during the appeals process.

The lawsuit was brought by retail trade groups that challenged the Federal Reserve Board's interpretation of the provision of the 2010 Dodd-Frank Act that established the price caps. Authored by Illinois Sen. Richard Durbin, the provision is widely known as the Durbin amendment.

The Durbin amendment has two main parts. One section, which applies to banks and credit unions with at least $10 billion of assets, requires the Fed to cap swipe fees on debit-card purchases at a level that's "reasonable and proportional" to the cost the bank incurs for each debit-card transaction.

The Fed responded to that edict by capping the fees at roughly 24 cents per transaction. Merchants argued that was far too high, and said the central bank erred when it raised the limit from an initial proposal of 12 cents.

While the district court judge agreed with the retailers, saying that many of the costs included in the 24-cent cap were not incremental to each transaction, the appeals court panel found the Fed's interpretation of the law was appropriate.

"Applying traditional tools of statutory interpretation, we hold that the board's rules generally rest on reasonable constructions of the statute," the appeals court said.

The second part of the Durbin amendment required the Fed to establish rules ensuring that merchants have the option of at least two unaffiliated networks over which to route debit card purchases. In response, the Fed wrote a rule that allows debit cards to carry one PIN debit network and one signature debit network, as long as the two networks are unaffiliated.

The district court judge found that retailers must be given the choice of routing each signature debit transaction, and each PIN debit transaction, over at least two networks. But again the appeals court disagreed.

The only sliver of good news Friday for retailers was a portion of the appeals court ruling that requires the Fed to provide further explanation about what the court described as a "minor issue" involving transaction-monitoring costs.

The decision hinged on a close reading of the language and punctuation of the Durbin amendment. The three-judge panel was critical of how the law was written.

"Perhaps unsurprising given that the Durbin amendment was crafted in conference committee at the eleventh hour, its language is confusing and its structure convoluted," the opinion states, later referring to it as "poorly drafted."

The court's opinion was written by D.C. Circuit Judge David Tatel, who was appointed to the bench by President Bill Clinton. Joining in the ruling were Judges Harry Edwards, an appointee of President Jimmy Carter, and Judge Stephen Williams, who was appointed by President Ronald Reagan.

Although banking groups remain unhappy that swipe fees are subject to a price cap, they expressed relief Friday that the existing cap will not go down significantly.

"Considering what would have happened if the lower court ruling stood, this is a reasonably good result for consumers," John Buhrmaster, chairman of the Independent Community Bankers of America, and president of 1st National Bank of Scotia, N.Y., said in a statement.

Frank Keating, president of the American Bankers Association, said in an e-mail that "we applaud the court for its decision today, which reverses a lower court's ruling that would have harmed banks of all sizes and made it more difficult for institutions to serve their customers."

But Carrie Hunt, general counsel for the National Association of Federal Credit Unions, said it's too early for banks and credit unions to declare victory in the case. "I think that obviously the merchants could appeal, so I think that we'll have to wait and see," she said.

Merchants, meanwhile, expressed disappointment with the decision.

"The Fed ignored congressional intent and worked to shield credit card companies and big banks," Mallory Duncan, general counsel for the National Retail Federation, said in a press release. "A self-described victory for the banks usually results in higher costs for consumers."

Durbin blasted the ruling, calling it a "giveaway to the nation's most powerful banks and a blow to consumers and small businesses across America." He seemed particularly incensed at the suggestion by the court that the amendment was added at the last minute.

"If the court had taken the time to carefully read the law and its history they would have known the amendment was debated and approved on the Senate floor with a strong bipartisan majority months before enactment," Durbin said in a press release. "Today's ruling is both confused and tilted heavily towards the big banks and card giants."