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Lawsuits fly over swipe fees and surcharges

Are retailers that accept debit cards being charged unreasonable swipe fees? Should the firms handling these “interchange” fees (the amount banks charge retailers) be required to refund money to retailers? In the case of a customers using a credit card, is it illegal for retailers to add a processing fee to the credit card charge? Lawsuits and rulings are providing some answers.

Things heated up when groups like the National Retail Federation filed a 2005 class-action lawsuit against Visa, MasterCard and several others alleging the credit card companies violated antitrust law by fixing swipe fees. The proceeds went to card-issuing banks and generated more than $40 billion each year.

Right now, U.S. District Judge John Gleeson in the Eastern District of New York is deciding the “fairness” of a $7.25 billion settlement deal proposed by the banks, but rejected as too low and unfair by a large number of retail merchants. Gleeson presided over a “fairness” hearing on Sept. 10 and his decision could come any day now.

Meanwhile, another lawsuit could mean retailers will see reimbursement for debit-card swipe fees they've been paying ever since a 21-cent cap on such fees went into effect 24 months ago. The reason: U.S. District Judge Richard Leon has ruled that the Federal Reserve was wrong in setting the 21-cent fee banks can charge retailers. (Note: The Fed is appealing and the 21-cent fee remains during the appeal, which is actually a good thing because without it banks could legally charge anything.)

Specifically, the judge sided with retailers that the Durbin Amendment to the 2010 Dodd-Frank financial reform legislation ensures fees for debit-card purchases must be “reasonable and proportional” to the cost of processing transactions. At 21 cents, the banks "recover significantly more" than permitted by Congress. In a bit of irony, before Dodd-Frank, the swipe fee was 43 cents. After Dobb-Frank, the Fed actually proposed a 12-cent fee cap, but turned around and upped that to 21 cents. Some sources claim the true cost of processing a debit-card transaction is closer to 4 cents. Leon’s ruling on reimbursements to retailers could come any day.

In still another lawsuit, U.S. District Judge Jed Rakoff of the Southern District of New York ruled as unconstitutional a New York state law that prohibits retailers from adding a surcharge to credit card purchases. Adding a surcharge, of course, is intended to offset a credit card’s swipe fees that can range as high as 3 percent of the transaction.

Several small New York retail businesses sued in June, claiming the law violated free-speech rights by penalizing them for adding surcharges, while at the same time allowing them to provide discounts to customers paying with cash or debit cards.

"This virtually incomprehensible distinction between what a vendor can and cannot tell its customers offends the First Amendment,” Judge Rakoff wrote. He further explained that the law created a “sellers' inability to effectively inform consumers of the true costs of credit and has the effect of artificially subsidizing credit at the expense of cash.” The retailers had argued the "surcharge" communicates to customers that accepting credit cards isn’t free, but are costly for merchants accept.

While the New York attorney general is reviewing the decision, it’s likely to have a coast-to-coast impact. That’s because other states have laws that prohibit retailers from adding a surcharge. These include the four most populous states — California, New York, Texas and Florida, along with Oklahoma, Kansas, Colorado and Massachusetts. If you’re in those states, what’s happening in New York could trigger a similar challenge where you are.

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