A U.S. appeals court has upheld a ruling that the Federal Reserve’s debit-card interchange fee cap may not comply with federal law, potentially forcing the central bank to rewrite Regulation II. Any reduction in the cap could affect the fees banks collect from merchants and retailers’ payment costs. The Fed has not said whether it will seek Supreme Court review or develop a replacement framework.
Court questions the flat 21-cent cap
The case concerns the Fed’s debit-card fee rules, adopted under the Durbin Amendment to the 2010 Dodd-Frank Act. In effect since 2011, the rules apply to banks with at least $10 billion in assets. They cap interchange fees at 21 cents per transaction, allow an additional 1 cent for fraud prevention, and provide for compensation equal to 0.05% of transaction value for fraud losses.
In the opinion, appeals court Judge David Stras said the law requires the cap to reflect the “incremental cost” of each transaction. The Fed’s calculation, however, included fixed and other costs that do not arise with every transaction, including fixed costs tied to authorization, clearing and settlement, network processing fees, transaction monitoring costs and fraud losses.
Stras said the same 21-cent cap for every transaction illustrated the rule’s departure from the statutory requirement, since actual costs vary from one transaction to another. Monday’s decision affirmed a lower court ruling last year that set aside the relevant provisions of Regulation II. It did not specify what process the Fed should follow next.
Merchants say fees exceed Congress’s intent
The lawsuit was filed in 2021 by North Dakota truck stop Corner Post. Retailers, industry groups and Dick Durbin, the Illinois Democratic senator who introduced the amendment, also filed briefs supporting the challenge.
The Merchant Payments Coalition, which represents retailers, supermarkets, convenience stores, gas stations and online merchants, welcomed the ruling. Doug Kantor, a member of the group’s executive committee and general counsel of the National Association of Convenience Stores, said courts had now twice found that the current rates allow banks to collect more from merchants and their customers each year than Congress intended. He urged the Fed to issue a compliant rule promptly, saying merchants want to ease pressure on everyday consumer prices.
The ruling does not set a new fee schedule or determine how much charges might ultimately fall. Banking groups could ask the Supreme Court to review the case. Brian Gardner, Stifel’s chief Washington policy strategist, expects industry groups may file such a petition in the coming weeks.
Fed’s 2023 proposal could inform a rewrite
Keefe, Bruyette & Woods said the Fed may begin work on at least one interim rule to replace the current framework, with the central bank’s 2023 reform proposal serving as a possible reference. Proposed under then-Vice Chair for Supervision Michael Barr, the plan would have set a base cap of 14.4 cents, plus a 0.04% adjustment for fraud losses and a 1.3-cent fraud-prevention adjustment.
Under the Fed’s estimates at the time, the cap on a $50 transaction would have fallen from 24.5 cents under the existing rules to 17.7 cents, a decrease of nearly 28%. The proposal was not a final rule, and the appeals court did not direct the Fed to adopt it.
TD Cowen Managing Director Jaret Seiberg said that if a new rule excluded fixed costs entirely, the debit interchange cap for large banks could fall below 5 cents per transaction. The current rate is 21 cents plus 5 basis points of the transaction amount. The estimate points to the potential for a substantial change, but the final level will depend on how the Fed calculates costs that the law allows it to include.
Supreme Court rulings opened the door to the challenge
Corner Post’s ability to challenge a long-standing rule was shaped by two Supreme Court decisions in 2024. In Loper Bright Enterprises v. Raimondo, the court overturned the practice of generally giving federal agencies greater latitude to interpret ambiguous statutes. In a separate Corner Post case, it ruled that the six-year deadline for challenging a federal agency rule does not necessarily begin when the rule is issued; it can begin when a plaintiff is injured.
That decision allowed Corner Post to sue over a rule that had been in place for years. With the appeals court now affirming the decision to set aside the provisions, the next steps depend on whether a Supreme Court petition is filed and how the Fed develops a replacement rule. The new method for calculating fees and its implementation schedule remain unresolved for banks, merchants and consumers.