The National Retail Federation, the Food Marketing Institute, the National Association of Convenience Stores and two retailers filed a lawsuit in federal court today saying the Federal Reserve failed to follow key requirements of a 2010 law when it adopted a flawed cap on debit card swipe fees that took effect this fall. NRF and the other groups say the failure has allowed big banks to continue charging unjustifiably high swipe fees and has discouraged price competition among credit card networks.

“The Federal Reserve was required by law to come up with swipe fees that were ‘reasonable’ and ‘proportional’ but what we got were neither,” NRF Senior Vice President and CEO General Counsel Mallory Duncan said. “Instead, the Fed allowed themselves to be influenced by the very banks they are supposed to regulate and raised the originally proposed cap to include expenses the law said were not allowed. In doing so, they literally gave away half the savings that could have been seen by merchants and their customers. We want them to go back and follow the law this time.”

“Rather than following the law, it’s almost as if the banks and the Fed were working hand-in-glove to block the genuine competition and common-sense price reductions Congress directed,” Duncan said. “The Fed’s regulations have blunted the competition that would have made greater savings possible.”

The regulations, which took effect October 1, have also led to an increase in swipe fees for some small-ticket purchases, the lawsuit says. The suit was brought by NRF on behalf of both NRF and its National Council of Chain Restaurants division, which filed comments with the Fed earlier this year warning of the potential impact on small purchases. In addition to FMI and NACS, other plaintiffs include NRF member Boscov’s Department Store, based in Reading, Pa., and NACS member Miller Oil Co., a convenience store/gas station chain based in Norfolk, Va.

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 required the Federal Reserve to set guidelines that would result in debit card swipe fees that are “reasonable” and “proportional” to banks’ costs in processing debit card transactions. Financial institutions with less than $10 billion in assets were exempt.

The Fed said in December 2010 that it had determined that it costs banks an average 4 cents to process a debit transaction, and proposed that the fees be capped at no more than 12 cents per transaction – triple banks’ actual cost. After intense lobbying by banks and the card industry, however, final regulations adopted in July 2011 set the cap at more than five times the actual cost – 21 cents plus 0.05 percent of the transaction and, in most cases, an additional 1 cent for fraud prevention.

While the Dodd-Frank law said the Fed could consider the incremental costs of acquiring, clearing and settling each transaction and specifically prohibited any other expenses from being used to inflate those costs, the lawsuit alleges that the Fed – under pressure from the banks and card industry – included costs that were barred by the law. Doing so has deprived merchants and their customers of the full extent of the swipe fee relief to which they were entitled.

The approximate 21-cent cap would lower swipe fees for most purchases, which averaged 44 cents but could range as high as several dollars under the previous formula of 1-2 percent of the transaction amount. This fall, however, both Visa and MasterCard announced that they would charge the maximum amount even on small-ticket transactions the card industry previously processed profitably for as little as 6 to 8 cents. The move would severely impact many members of NRF’s National Council of Chain Restaurants division, whose transactions often amount to only a few dollars.

“Congress passed this law to cap swipe fees but the banks have turned a ceiling into a floor and raised fees dramatically higher for quick-service restaurants across the nation,” NCCR Executive Director Rob Green said. “This clearly was not the intent of Congress.”

The plaintiffs also said that the Fed’s final rules discourage competition among debit card networks. In order to establish a competitive market between networks such as NYCE, Pulse and Plus as well as the Visa and MasterCard networks, the law required that merchants be given a choice of two networks on every transaction. Under the Fed’s final regulations, however, banks can limit their cards such that merchants may never have a choice of networks. The lack of competition will allow the dominant networks to continue increasing their fees.

The lawsuit was filed in U.S. District Court in Washington, D.C.

In 2010, identity theft and fraud claimed fewer victims than in any other period since Javelin began conducting surveys in 2003. Driving that decrease was the reduced rate of existing account fraud, although incidents of all types of fraud dropped from 2009. Meanwhile, consumer costs, the average out‐of‐pocket dollar amount victims pay, increased, reversing a downward trend in recent years. This increase can be attributed to new account fraud, which showed longer periods of misuse and detection and therefore more dollar losses associated with it than any other type of fraud. The Javelin 2011 Identity Fraud Survey Report provides a detailed, comprehensive analysis of identity fraud in the United States to help consumers and businesses better understand the effectiveness of methods used for its prevention, detection and resolution. A nationally representative sample of 5,004 U.S. adults, including 470 fraud victims, was surveyed via a 50‐question phone interview, providing insight into this crime and the affects on its victims. This report, supported by the Better Business Bureau, is issued as a longitudinal update to the Javelin 2005, 2006, 2007, 2008, 2009 and 2010 Identity Fraud Survey reports and the Federal Trade Commission’s (FTC’s) 2003 report.

Executives of Wal-Mart Stores Inc and McDonald's Corp say new U.S. rules limiting debit card processing fees will not cut their costs as much as they hoped, and could actually boost their expenses. Treasurers from the world's largest retailer and biggest restaurant chain said at a financial industry conference on Friday that debit card processing costs, or interchange fees, were not low enough despite the new limits to have a real impact on retailers.

The interchange fees that banks charge to merchants were capped on Oct. 1 as a result of the Durbin amendment, a provision of the 2010 Dodd-Frank financial reform law.  Under the Durbin amendment, the Federal Reserve capped debit card processing fees at 21 to 24 cents per transaction, roughly half the previous industry average. Banks have said the new rule is a windfall for retailers, moving as much as $8 billion in revenues off lenders' books. But U.S. retailers that rely on a high volume of small dollar transactions could see an increase in their debit card processing costs, because prior debit costs for smaller purchases had lower fees. However, 7-Eleven gas stations and convenience stores will likely see a mixed impact from the capped fees. The world's largest convenience store chain's processing costs for gasoline purchases will likely drop, but costs will likely rise on purchases customers make inside their stores.

Isis, the national mobile commerce joint venture between AT&T Mobility, T-Mobile USA and Verizon Wireless, today announced that Visa, MasterCard, Discover and American Express will join Isis in making mobile commerce a reality for millions of U.S. consumers and merchants. Isis’ relationships with all four payment networks mean that with Isis-enabled phones and payment terminals in place, merchants and consumers will have ubiquity and freedom of choice when it comes to payment network acceptance.

The latest annual American Bankers Association survey of consumer banking preferences shows online banking continues to grow as the popularity of ATMs decline. The August survey of more than 2,000 online consumers found that 62% of respondents named the online channel, meaning laptops or personal computers, as their preferred banking method versus only 36% in the 2010 survey. From 2007 through 2009, Internet banking scored in the low to mid-20s in popularity. Consumers now prefer online banking to all other channels combined. While online banking has long been popular with tech-oriented younger Americans, older consumers are beginning to embrace the channel in a big way. Some 57% of respondents aged 55 and up said online was their preferred banking method against only 20% who stated that preference last year. The popularity of visiting branches fell a bit, from 25% of respondents naming the branch as their preferred banking channel in 2010 to 20% this year. Six percent of respondents said the mail is their preferred way of banking versus 8% in 2010. Only 3% of respondents preferred the telephone, down from 6% last year. Perhaps the biggest surprise in the results is the plunge in ATMs’ popularity: only 8% of consumers in 2011 prefer the ATM channel versus 15% last year.

A recent report by Aite Group claims that shifting consumers from debit cards use to prepaid cards is a ‘smart’ way to help banks recoup lost revenue from reduced debit interchange fees.

“Big banks are anticipating a significant loss in debit interchange,” states Ron Shevlin, senior analyst at Aite and author of the report. “Their responses to this have been a little like chickens running around with their heads cut off.”  Eliminating free checking, adding new ATM fees and killing reward programs have all surfaced as ways to make up for the expected revenue losses caused by Durbin.

But that’s not the smartest way to go. Shevlin recommends that banks increase their prepaid market focus, rather than opt for negative strategies that will lead to “unwanted customer behavior” like an increase in checks and cash usage. The shift to prepaid cards, he explains, is feasible because there’s already a population of “heavy” prepaid card users and because prepaid cards are not exclusive to the unbanked, like many financial players believe. In fact, Aite Group believes that banks can recoup somewhere from 20% to more than 50% of anticipated lost debit card interchange revenue by marketing prepaid cards to their customers, particularly by focusing the product to their “heavy” transactors.

To achieve success, banks will need to educate and incentivize their consumers to use prepaid cards, much like they did in the debit space. This is where credit unions can step in and capitalize on a “new market” for prepaids. Traditionally, prepaids have been targeted to narrow segments, such as the unbanked and millennials.  With large FIs - and even Walmart - putting big dollars into marketing prepaid cards, demand from credit union members will grow even as cardholders continue to hold on to checking and debit.

Credit unions benefit most by having a prepaid solution in place that is both robust and flexible. This means offering members both a gift and a reloadable solution.  For more information about MAP Prepaid solutions, contact Herb Tajalle at 866-598-0698, ext 1616 or herb.tajalle@mapacific.com.