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Court To Fed: Keep The (Inter)Change
But then debit cards took off. By 2011, debit cards were used in 35 percent of noncash payment transactions, and have eclipsed checks as the most frequently used noncash payment method. Acquiring banks realized that they were sitting on a potential pile of revenue. (“That’s an awfully sweet Point of Sale terminal you got there. It would be a shame if anything happened to it…”) Acquirers, once eager to get adoption of both signature and PIN-based debit cards, now started jacking up the fees.
From 1998 to 2006, merchants faced a 234 percent increase in interchange fees for PIN transactions, and by 2009, banks were making over $16 billion on debit card fees alone. For most retailers, debit card fees were their single largest operating expense behind payroll. Banks and card brands (Visa and MasterCard, for example) wanted to do everything they could to force merchants to take debit cards (especially signature-based debit cards with even higher fees) and to have consumers use them, since more use meant more money in fees.
As part of financial reform and the Dodd-Frank legislation, Congress acted to address what it perceived as ever increasing fees for debit card transactions. They passed laws limiting the interchange and other fees that could be charged on both PIN- and signature-based debit cards, with the intent of putting downward pressure on these fees, and they tasked the Federal Reserve to issue regulations to reduce these fees.
The idea was that banks could be reimbursed for their actual costs associated with processing the debit cards, but that the fees were not intended to be a profit center for the banks. The law required that the Fed issue regulations to ensure that the fee charged by the issuer “with respect to an electronic debit transaction…be reasonable and proportional to the cost incurred by the issuer with respect to the transaction.” In doing so, Congress directed the Fed to consider the incremental ACS costs relating to particular transactions, but not to consider “other costs.”
So what is the issuer’s “cost” with respect to the transaction? If I am an issuer, I want to recover not only the costs of the hardware and software associated with processing, but personnel, insurance, real estate, taxes, marketing, advertising, promotion, legal fees—well, you get it: a pro rata share of everything.
As a merchant, I want much more “costs” excluded. So are lawyers and lobbyist costs, air conditioning and public relations fees “associated with” a transaction?
All of this was hashed out in the regulations when the lobbyists descended on the Federal Reserve. Ultimately, with prodding from lobbyists, the Fed concluded that, in allowing costs “associated with” transactions and disallowing costs not “associated with” transactions, the Fed would allow acquirers to charge merchants pro rata costs of a bunch of things which might otherwise be considered to be overhead costs. It’s an interpretation that eats up the rule. Some small portion of the costs of the bank CEO’s private jet to fly to a business meeting is “associated with” my transaction of buying a cheeseburger with a debit card. After all, a bank needs a CEO, and the CEO needs to go to meetings, right?
The Federal Court disagreed.