Retailers were singing the praises of a federal judge's ruling July 31 that the Federal Reserve Board overstepped its authority in how it capped debit-card fees. And banks were humming a different tune.

The ruling came as a surprise to many.

MasterCard CEO Ajay Banga said he was not aware of the ruling when confronted with a question about it during a July 31 quarterly earnings call. It also caught analysts who keep a close eye on payments activity off guard.

"I hadn't even heard about this until the ruling came out," says Gil Luria, industry analyst for Los Angeles-based Wedbush Securities, in an interview. "It was like a Hail Mary pass for the retailers and it connected."

And retailers are reacting as if a prayer has been answered.

"I think it’s fair to say that the merchant community is ecstatic. The card market has been ossified for some time," said Mallory Duncan, general counsel for the National Retail Federation, in an interview.

The Durbin amendment, a provision of the Dodd-Frank Consumer Protection Act, has been a subject of controversy in the payments industry since it was enacted in 2010 and, the following year, led to a 21-cent fee cap on debit transactions for larger issuers.

U.S. District Judge Richard Leon filed his ruling in response to a November 2011 lawsuit filed by the National Retail Federation, the Marketing Institute and NACS, formerly the National Association of Convenience Stores.

Bill Hughes, senior vice president for government affairs for the Retail Industry Leaders Association, says the math behind the Fed's fee cap doesn't add up.

The Federal Reserve's debit-fee cap was "more than three times higher than the cap it had proposed just months before and more than five times higher than the Federal Reserve found such transactions to cost," Hughes says in a prepared statement.

Not surprisingly, financial institutions dread thought of yet another change that would slash transaction fees.

A coalition of trade associations representing thousands of financial institutions issued a press release criticizing the judge's decision "to increase the $6 billion windfall now being enjoyed by large merchants at the expense of consumers." 

"This is an extraordinary decision that will have major repercussions for customers of both small and large financial institutions," coalition spokesman Chris Matthews states.

Camden R. Fine, president and CEO of the Independent Community Bankers of America, issued a statement that says, "it is disheartening that the retailers continue to add to their windfall while failing to live up to their promises of lower prices."

For the time being, Judge Leon says the cap rule will stay in effect, pending new regulations or interim standards.

That leaves the door open for a lot of speculation as to what happens next. So much so that, even in the short term, banks may not be clear about what to do. 

"This new ruling will create even more chaos for consumers and small banks," Richard Hunt, president and CEO of the Consumer Bankers Association, says in an issued statement.

The ruling illustrates that the "massive war" between retailers, banks and networks is far from over, Luria says.

Because any change in the cap could potentially take more value out of issuing banks, it is difficult to predict what the Federal Reserve will do next, Luria says.

"The board could appeal the ruling, or throw it back to Congress for clarification, but they are probably less inclined to put more pressure on banks," Luria says.

Retailers have argued that debit fees should be capped at about 12 cents per transaction, he adds.

With the debit transaction fee cap in question again, another key aspect of Durbin becomes equally uncertain as payments stakeholders will begin to wonder what, if anything, may happen to the multiple debit network routing mandate.

That facet of the federal mandate has complicated the nation's transition to EMV chip-based debit cards, which have not had to accommodate multiple debit networks in other countries.

The NRF's Duncan says in a prepared statement that the introduction of routing options didn't have the proper effect because of how the Federal Reserve Board ultimately set fee caps.

"Congress clearly told the Fed to introduce competition and transparency into the debit card marketplace by making multiple networks available, so as to reduce swipe fees for merchants and their customers," Duncan says.

"The Fed failed to do so, and the court rightly ruled against them as a result."

Judge Leon's decision represents the first step in "setting these initial wrongs right and will ensure that swipe fee reform is done correctly," he adds.

The multiple network mandate has already been implemented, Luria says, but it is not out of the question that today's ruling could lead to discussions about expanding that mandate.

Because Visa Inc. and MasterCard Inc. were not part of the litigation that led to the ruling, both card brands chose not to comment on Judge Leon's decision. The Fed says it is reviewing the judge's decision.

Kevin Wack contributed reporting to this story.


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