Retailers sue Fed, say debit card fees are still too high

— -- A coalition of retail organizations filed a lawsuit Tuesday charging that the Federal Reserve failed to comply with a law requiring it to reduce fees banks charge retailers when consumers use debit cards.

The law led the Fed to enact new rules, which went into effect Oct. 1, that said banks could charge a maximum of 21 cents when consumers pay for purchases with a debit card — slightly more if other criteria are met. That's down from an average of 44 cents per transaction. The Fed initially proposed 12 cents.

While neither banks nor merchants were happy with the Fed's ruling, the National Retail Federation, Food Marketing Institute and National Association of Convenience Stores now contend that the Fed overlooked the language of the original provision in the Dodd-Frank banking reform legislation and set the fees too high. That provision, named the Durbin amendment after Sen. Richard Durbin, D-Ill., called for debit card "swipe" fees to be "reasonable and proportional" to the issuer's transaction costs.

"When they (the Fed) issued their final rule, they completely bent to the arguments of the banks to such an extent that they pretty much ignored the law," says Mallory Duncan, senior vice president and general counsel for the NRF.

The lawsuit says debit card transactions cost banks an average of 4 cents per transaction. Duncan says the extra money adds up to billions a year.

The banking industry called the lawsuit "disgraceful."

"Retailers continue to enjoy the benefits of debit cards — faster checkout, customer convenience, lower fraud costs — yet clearly they don't want to pay for it or keep their promises to U.S. consumers," says Frank Keating, CEO of the American Bankers Association. Keating says the Durbin amendment provided retailers "a $7 billion windfall in profits annually."

Banks responded to the swipe fees cap with plans to charge customers a debit card fee to make up for lost revenue. Bank of America, Wells Fargo and others dropped those planned fees after consumer backlash.

In a statement, the Fed said it's aware of the lawsuit and is reviewing it.