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Industry groups praise Supreme Court decision on swipe fees

Industry groups praise Supreme Court decision on swipe fees

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Photo: Shutterstock

The National Retail Federation (NRF) welcomed the U.S. Supreme Court’s July 1 ruling that allowed a lawsuit to proceed that alleged the Federal Reserve set its 2011 cap on debit card interchange, or “swipe,” fees too high.

Five federal appeals courts ruled against the Corner Post, a truck stop and convenience store in Watford City, North Dakota, for missing the six-year statute of limitations for filing a notice of appeal under the Administrative Procedure Act (APA). But the 6th U.S. Circuit Court of Appeals ruled that the six-year period does not begin to run until a party has been aggrieved.

The retailer argued, according to court documents, that it should not be bound by the statute of limitations because the store opened in 2018, after the statute of limitations had expired. It argued that the six-year period should only begin to run if a business is adversely affected, which for Corner Post would be March 2018, when it accepted its first debit card payment.

“There are multiple reasons why the statute of limitations has not run in this case,” said Stephanie Martz, NRF’s Chief Administrative Officer and General Counsel. “The heart of the matter is that a small business that has been harmed by a regulatory lapse should not be denied its day in court on a formality, especially one that is in dispute. The Federal Reserve set the limit much higher than Congress intended, and merchants like Corner Post have been overpaid by millions of dollars as a result, which in turn has driven up prices for their customers. That harm is ongoing and has not changed with the passage of time. The Supreme Court did the right thing by allowing this case to proceed on its merits.”

NRF, based in Washington, DC, is not a party, but Martz is one of the attorneys in the case.

The lawsuit alleges that the Fed set the cap higher than was allowed under the Durbin Amendment, a 2010 law that required the Fed to adopt regulations that would result in debit card swipe fees that were “reasonable” and “proportionate” to banks’ costs. Congress limited the fees the Fed could consider to incremental expenses, and the Fed initially proposed a cap of 7 to 12 cents per transaction. But under pressure from banks, the Fed also factored in fixed fees, fraud losses, transaction monitoring and network processing costs. The final cap, which applies only to financial institutions with at least $10 billion in assets, was set at 21 cents plus 1 cent for fraud prevention and 0.05 percent for fraud loss recovery.

Since then, the Fed has reviewed banks’ fees every two years, as required by law, but has not kept the cap in line with falling costs. A Fed study found that banks’ allowable fees averaged 7.7 cents per transaction in 2009, meaning the cap was originally less than three times the fees. The latest study showed that the average had fallen to 3.9 cents in 2021, making the cap more than five times banks’ fees.

Last October, the Fed finally proposed lowering the cap to 14.4 cents per transaction and reducing the fraud loss amount to 0.04% but raising the fraud prevention amount to 1.3 cents. In May, NRF filed comments suggesting that the base rate should be 10.5 cents to keep it at the original rate, though tiered rates could be set based on banks’ debit card transaction volume. NRF said the 1-cent fraud prevention fee should be eliminated since the introduction of EMV chip cards in 2015 shifted fraud costs to merchants, and that the fraud fee percentage should be based on banks’ net costs after accounting for fraud borne by merchants.

Before Durbin, banks charged about 45 cents to process a typical debit transaction, and regulation has saved merchants $9.4 billion a year, with studies showing that 70% of the savings have been passed on to consumers. Debit and credit card swipe fees are the largest expense for most merchants after labor, driving up prices by more than $1,100 a year for the average family. Debit swipe fees will total $36.3 billion by 2023, according to the NRF, and total swipe fees have more than doubled over the past decade to a record $172 billion.

The New Civil Liberties Alliance (NCLA) – a nonprofit organization that opposes the “unlawful power of state and federal agencies” – has also filed an amicus curiae brief in Corner postInc. v. Board of Governorswhereby the Court was asked to consider the six-year limitation period provided in the Administrative Procedure Act (APA) as the applicable period.

The Federal Reserve System’s Board of Governors adopted Regulation II in 2011, which sets fees for debit card transactions. Corner Post began operating in 2018 and filed a lawsuit against Regulation II in 2021, alleging excessive swipe fees under the rule. The U.S. Court of Appeals for the Eighth Circuit ruled that Corner Post’s ability to sue expired in 2017, six years after the rule was first enacted.

The Supreme Court recognized that federal law allows Corner Post to bring a lawsuit within six years of the beginning of Regulation II harm, which it did, regardless of when the rule was originally promulgated. Setting the statute of limitations within six years of the rule’s promulgation “would absurdly require that Corner Post have brought legal action before it was even incorporated,” NCLA said. The justices held that the APA entitles Corner Post to adequate and meaningful judicial review of the rule in court.

“This decision is a huge victory for individuals and businesses who have faced problematic regulations but were unable to challenge them due to the passage of time,” he said. Kara Rollins, trial attorney for the NCLA.As this case demonstrates, there is little point in denying a party the ability to challenge harmful regulations based on when they were enacted versus when the harm occurred. Doing so would turn the traditional claims accrual process on its head.”

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