By Pete Schroeder

WASHINGTON The U.S. Federal Reserve is expected on Wednesday to propose an official review of the fees banks can charge retailers for debit card transactions, setting up a battle between the two industries that could result in a court challenge.

The scheduled Fed board meeting will mark the first time in over a decade that the central bank has proposed revising the fees, which generated around $24.31 billion for lenders in 2019, the most recent Fed data shows.

The Fed has not said how it plans to change the fees, which have long been criticized by retailers as disproportionately high, and a spokesman for the central bank declined to comment.

Analysts said they expect the Fed will initially solicit public feedback on a range of topics, such as how technological developments or shifting fraud patterns have affected costs.

Austen Jensen, a lobbyist with the Retail Industry Leaders Association, which represents Target and The Home Depot among other large retailers, said the group expects the Fed will ultimately propose lowering the caps.

"It’s out of line, it needs to be adjusted," he said. "I feel confident we’re going to come out on a good spot on this."

The Wall Street Journal reported last week that the Fed will lower the caps, sending shares in credit card companies Visa and Mastercard lower.

In a letter to the Fed sent Friday, nine major bank trade groups said retailers don't pass on to consumers savings reaped from the 2011 cap and that claims they would pass on future savings "should be viewed with robust skepticism."

The 2010 Dodd-Frank financial reform law ordered the Fed to cap the fees at a level that is "reasonable and proportional" to the cost of processing the transaction. In 2011 the central bank capped them at 21 cents per transaction, plus 0.05% of the transaction cost. Banks can charge an additional cent per transaction if they meet certain fraud prevention standards.

Analysts said that it is likely the Fed could face a legal challenge from either industry if it pursues new caps.

TD Cowen analyst Jaret Seiberg said in a research note the Fed "likely expects both the banks and the merchants to challenge any final...rule even if that final proposal simply ratifies the status quo."

(Reporting by Pete Schroeder; editing by Michelle Price and Aurora Ellis)