Judge Rejects Fed’s Cap on Debit Card Fees

The billions of dollars that banks earn when consumers swipe their debit cards are under threat after a federal court ruling on Wednesday. The question is whether consumers will see any savings.

As part of its efforts to overhaul banks after the financial crisis, Congress targeted the fees that banks and other firms earn from retailers when consumers use debit cards. Lawmakers intended to limit the fees, and left it up to the Federal Reserve, a primary bank regulator, to work out the specifics of the cap.

But on Wednesday, Richard J. Leon, a district court judge in Washington, ruled that the Fed had failed to follow Congress’s wishes in setting the cap. In doing so, the Fed had, in effect, been too kind to the banks. If the ruling stands, the Fed may have to place a lower limit on the so-called interchange fees, which could further reduce the revenue that financial firms reap from debit cards.

Judge Leon’s opinion was strongly worded. He said that, in working out the details of the fee cap, the Fed had run “completely afoul of the text, design and purpose” of what Congress had intended.

“We are reviewing the judge’s opinion,” Barbara Hagenbaugh, a Fed spokeswoman, said.

Senator Richard Durbin, Democrat of Illinois, who was behind the legislation that capped the fees, welcomed the ruling. “Today’s decision by the Federal District Court is a victory for consumers and small business around the country and will lead to lower interchange rates for billions of debit card transactions each year,” Mr. Durbin said.

Courts have struck down other aspects of the financial overhaul, but in ways that favor banks. The fight over debit card fees pits the powerful industries of retailing and banking against each other.

“It is a very significant decision,” Stacie E. McGinn, a partner at Simpson Thacher, said. “It’s a decision that clearly favors the merchants.

The court’s ruling was made in response to a lawsuit brought against the Fed by an array of retailers. The court on Wednesday delayed putting the order into effect. It has scheduled a hearing for Aug. 14 to decide on how to proceed.

The fee cap that the Fed introduced in 2011 did lead to much lower debit card revenue for banks. Bank of America, for example, saw its debit card revenue fall by $1.7 billion last year as a result of the cap. The banks now face the prospect of a deeper reduction. But critics of the banks have said they have made up for at least some of the lost revenues by charging other types of fees.

“It reduced debit interchange revenue by about 50 percent,” Jason Goldberg, a bank analyst at Barclays, said. “It now perhaps gets reduced a bit further.”

The banks and retailers are sparring over whether lower debit fees for retailers benefit consumers. The banks say the retailers have pushed for the lower fees not to benefit customers, but to pad their own bottom lines.

“It was â€" and still is â€" all about trying to help retailers increase profit margins while providing no real benefit to consumers,” said Frank Keating, president of the American Bankers Association.

Retailers have said consumers would gain. “Merchants are ready to pass lower swipe fees along to consumers in the form of discounts and other benefits as soon as reform goes into effect,” Mallory Duncan, the general counsel of the National Retail Federation, said in 2011 before the Fed’s cap was introduced. The federation is an industry group and one of the entities that brought the suit against the Fed.

On Wednesday, Mr. Duncan said customers had already seen benefits. “You see gas stations offering savings for cash and for debit,” he said. “Nobody’s margins are going up right now.”

Jessica Silver-Greenberg contributed reporting.