Court decision overturns Fed cap on credit card fees

A US district court yesterday ruled the cap on interchange fees that banks charge retailers for processing credit card transactions to be unlawful, describing it as excessive and not in keeping with legislators' intent.

The current cap, set by the Federal Reserve in 2010 after the passing of the Dodd-Frank Act – the legislative overhaul of US financial regulations prompted by the financial crisis – allows banks to charge merchants up to $0.21 per transaction in interchange fees.

Yesterday's ruling, which accused the Fed cap of running "completely afoul of the text, design and purpose" of the original law, will likely mean a lowering of the fee cap, though when and by how much remains uncertain.

Banks can continue to charge $0.21 until a new cap is set, which the court emphasised should take months, rather than years. It was not clear at the time of writing whether the Fed intended to appeal the decision.

American Bankers' Association president Frank Keating urged the Fed to "pursue all legal means" to reverse the decision, which he said would have "disastrous consequences for the [banks] affected and the communities they serve."

The National Retail Foundation, the world's biggest retail trade association and one of the plaintiffs, called today's ruling "the first step" in righting earlier wrongs. It scorned the Fed for failing to "heed Congress's call to set fee standards that were ‘reasonable' and ‘proportional' to the actual cost of a transaction", accusing it of manufacturing a standard that was two to three times higher than recommended.

Democrat senator Dick Durbin from Illinois, who introduced the original amendment to curb credit card fees, said in a statement that the Fed's decision "to bend to the lobbying by the big banks and card giants cost small businesses 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".

Yesterday's decision comes on the heels of the European Commission proposal eight days ago to limit European Union interchange fees to 0.2% of card transactions – potentially handing the retail industry two decisive victories in one week. Merchants have long complained that interchange fees force them to raise prices, undercutting business and the economy as a result.

"This case decision in the United States is timely indeed, as it is hot on the heels of the publication of draft regulations from the European Commission on setting statutory limits on interchange throughout Europe," said Fiona Ghosh, payments expert at global law firm Eversheds.

She added, however, that recent developments raise questions over how long credit card issuers can keep issuing credit for free.

"Consumers cannot have their cake and eat it. If we are not paying for interchange, the payment systems will look to make their money elsewhere and that could be in raising other card fees," Ghosh said.