WASHINGTON — A group of retailers filed suit against the Federal Reserve Board on Tuesday, alleging that the central bank veered away from the instructions of Congress when it allowed banks to charge roughly 21 cents in interchange fees for each debit-card transaction.
The lawsuit argues that the Fed's initial proposal, which would have capped such fees at 12 cents, complied with the intent of lawmakers. The groups claim that the Fed strayed from the Durbin Amendment's explicit instructions when it allowed banks to charge more in its final rule.
The plaintiffs include three retail trade groups — the National Retail Federation, the National Association of Convenience and the Food Marketing Institute — which were some of the leading advocates for caps on debit interchange fees.
They argued in a press release Tuesday that the Fed caved to pressure from banks when it issued its rule in June.
"The Federal Reserve was required by law to come up with swipe fees that were 'reasonable' and 'proportional' but what we got were neither," Mallory Duncan, senior vice president of the National Retail Federation, said in a press release.
"Instead, the Fed allowed themselves to be influenced by the very banks they are supposed to regulate and raised the originally proposed cap to include expenses the law said were not allowed. In doing so, they literally gave away half the savings that could have been seen by merchants and their customers. We want them to go back and follow the law this time."
Reached for comment Tuesday, a Federal Reserve spokesperson said only, "We are aware of this lawsuit, and we will be reviewing it."
Trish Wexler, spokeswoman for the Electronic Payments Coalition, which represents financial institutions on the interchange fee issue, said in an email: "Apparently, retailers aren't happy with their $8 billion windfall - even though they're pocketing all of it, with no evidence of passing any of it back to their customers. And now they want even more?"
"We all know the truth — retailers won't truly be happy until they pay zero to accept cards," Wexler said. "They don't want to pay their fair share of this system that brings them more sales and increased security, and want customers to foot the bill instead. That's simply not fair."
The Dodd-Frank Act required the Fed to ensure debit interchange fees were "reasonable" and "proportional." The central bank initially proposed to cap such fees at 12 cents per transaction, but raised the cap to account for more costs than were covered by its initial plan.
When the Fed issued the final rule in June, it said the base cap accounts for: network connectivity costs, costs of hardware, software and labor and transaction monitory costs. It also addressed an industry criticism by allowing banks to charge 5 basis points per the size of the transaction to account for fraud losses.
Neither the retailers nor the banking industry were pleased with the final rule. Banks continued to argue that the Fed cap was too low and did not properly account for the costs in setting up a debit card system. Retailers, meanwhile, accused the central bank of turning traitor by raising the fee cap, arguing it had bowed to lobbying from the large banks.
Fed officials said at the time they were unhappy with the rule, warning it could hurt small banks that were technically exempt from it, but said their hands were tied by Congress.
In the case filed Tuesday in U.S. District Court for the District of Columbia, the retailers' legal argument hinges on the instructions that Congress gave to the Fed.
The 2010 law states that the Fed should consider the incremental costs associated with each debit-card transaction when it is establishing a cap on fees, but it should not consider other costs that are not specific to any individual transaction.
The retailers argue that the Fed simply ignored this distinction — declining in its final rule to determine incremental costs associated with a particular transaction.
Instead, the suit alleges, the Fed created a third category of costs, which it said are specific to a particular transaction but are not incremental costs related to the issuer's role in the authorization, clearance and settlement of the transaction, and claimed the discretion to include those costs when determining the fee cap.
"In so doing, the Board disregarded Congress's carefully articulated statutory structure, which segregates costs into those that must be included and those that must be excluded," the complaint alleges.
This is the second lawsuit over the Fed's rule. TCF Financial Corp. filed suit after the initial proposal by the Fed, claiming the Durbin Amendment was unconstitutional. It dropped its suit after the final rule was issued.
