Appeals Court Allows Federal Reserve to Set Higher Rate on Debit Card Swipe Fee

Debit Card Swipe

A big victory for the Federal Reserve Bank as a federal appeals court reimposed a 2011 Fed rule which enables banks to set higher charges on debit cards. A group of retailers challenged the rule and as the verdict went against them, it’s a huge setback for them.

Earlier, the lower court delivered the verdict in favor of the merchants. It was in July 2013 when the lower court favored the merchants by striking down the cap imposed by the Federal Reserve Bank on debit card swipe fees. The court questioned Fed’s authority to set cap limit and indicated that the cap is too high.

The current ruling, however, reinstated what the Fed proposed. The swipe fee rule by the Federal Reserve on Visa and MasterCard will increase debit swipe fees for small businesses and retailers said this part has been completely ignored by the court.

The swipe fee is what retailers would have to pay to the government when a customer uses his debit card. Federal Reserve initially wanted the fee to be 12 cents for every transaction but then proposed it to be 21 cents. The fee was 44 cents earlier, too high for some retail businesses, more than 8% of a $4 purchase.

A representative of a restaurant chain called Liz Garner said, “To have fees that continue to be so unreasonable in the debit card space is detrimental to the folks that we represent as well as ultimately their customers…” She hinted that the retailer groups might take this issue to the Supreme Court of United States.

They raised an issue that appears seemingly valid. The fees set by the Fed would cover more than the direct cost of transaction as additional costs such as fraud monitoring will also be included in the fee. That’s precisely why the merchants are fuming. They said, “Our industry is extremely supportive of debit, but we are very frustrated with how the Fed implemented it and how the networks responded.”

The previous ruling was handed by Richard Leon, who is a US District Court Judge. He said the Fed’s policy to increase the debit swipe fee would finally affect consumer spending due to inappropriate inflation of debit card transaction fees.