Retailers Suing The Fed Over Payment Processing Fees

The Impact of the Durbin Amendment on Small Business Merchants

The introduction of the Durbin Amendment to the Federal Reserve has angered several business organizations because of changes to small business merchant account fees. The situation has gotten bad enough that three industry associations and two retailers are now suing the Federal Reserve over the introduction of the amendment, which has restructured small business merchant account fees in a way that hurts small business.

The amendment was first introduced with the language that it would be used to protect retailers. It afforded the Federal Reserve with the ability to set the retail credit card processing costs that are charged when debit card transactions are processed. The payment processing fee structure would supposedly reduce costs.

The proposed purpose of the amendment was to decrease debit card fees. It was suggested that this would help spur economic growth because retailers would be able to sell their items at a lower cost. This is because they would pay lower fees to the banks whenever they processed a debit card transaction. The reduction in prices, in turn, would encourage consumers to buy more, which would also encourage companies to start hiring more often.

Before the amendment was passed, the transaction fee was 44 cents for each transaction. The Durbin Amendment allows the Federal Reserve to to cap the fee at only 21 cents. This adjustment in merchant services, in theory, would spur economic growth.

All of this sounds like something retailers would be happy to hear about, but the following organizations are suing the Federal Reserve over the implementation of the Durbin Amendment:

  • National Association of Convenience Stores
  • National Retail Federation
  • Food Marketing Institute
  • Miller Oil Co
  • Boscov’s Department Stores

The plaintiffs are arguing that the amendment is not bringing about the reduction in retail credit card processing fees that was promised by the Federal Reserve. Instead, the interchange fees that are being charged for debit card transactions have failed to comply with the Durbin Amendment. They further argue that the amendment was heavily influenced by the banking industry itself. The result, they claim, is higher costs for small retailers, instead of the lower payment processing costs promised by the amendment.

The cause of the commotion primarily revolves around small ticket items, which are traditionally priced differently during payment processing. While the transaction fee was 44 cents for large purchases, it was only 12 cents for small ticket items. The amendment now allows banks to charge 21 cents per transaction for even the smallest items on a small business merchant account, in addition to 0.05% of the cost of the total transaction. The result is that small retailers, which earn most of their profit from small ticket items, are being charged more heavily by the banks than ever before on their small business merchant accounts.

Additionally, the Durbin Amendment only applies to the fees charged directly by the bank. Most retailers rely on a third party company to handle their retail credit card processing because they don't have the resources to process these transactions on their own. The amendment does not affect what these third party providers are allowed to charge. For this reason, most of the savings are going to the third party merchants, who haven't changed their pricing schemes for retail credit card processing.

The general council of the Food Marketing Institute, George Green, argues that their members will receive "irreparable monetary injury" as a result of the way that the amendment was drafted. He argues that the rules violate the "clear language in the law" in a way that will make the banks more powerful at the expense of retailers and consumers.

The plaintiffs also argue that the rules are effectively discouraging competition between credit card networks, market activity that should drive costs down. They argue that this stands in direct contrast with the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, which encourages competition.

The lawsuit claims that these rules were included in the amendment as a result of pressures from the banking and card industries.

Expect to see more merchants not accepting card payments as fees continue to rise.