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A federal court in North Dakota has struck down the Federal Reserve’s revised debit card interchange fee rule, concluding that the US central bank overstepped its statutory authority under the Durbin Amendment.
In a 44-page decision issued on August 6 in Corner Post, Inc. v. Board of Governors of the Federal Reserve, US district judge Daniel M. Traynor quashed the regulation.
However, the judge put the ruling on hold pending appeal, to avoid leaving debit card fees completely without regulation.
The ruling also keeps in place the Fed’s pending updates to Regulation II, finalised in 2023, which are intended to lower the interchange cap based on the latest issuer data.
The ruling has already prompted strong responses from financial players, including the Bank Policy Institute and the Clearing House, which issued a joint statement.
“We are severely disappointed in the Court’s interpretation of the Durbin Amendment,” the statement reads.
It goes on to argue that the payment system is “secure, convenient and reliable because of significant investment by banks, and today’s decision, if affirmed, would undermine that system”.
“It would disincentivize innovation and perpetuate a misguided notion that banks should be forced to offer products and services without being able to recover the costs necessary to sustain those investments,” the statement says, with the financial players vowing to “evaluate the Court’s decision and continue to pursue every avenue to ensure that banks can recover their costs and reasonable return, as the Durbin Amendment itself provides.”
Fees and competition
At the heart of the dispute was the Fed’s interpretation of the Durbin Amendment’s requirement that interchange fees are “reasonable and proportional to each individual issuer’s cost”.
The Durbin Amendment, passed in 2010 as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act, was designed to cap debit card interchange fees charged by large banks and to promote competition in payment processing.
It applies to issuers with more than $10bn in assets and directs the central bank to set in place a “reasonable and proportional” limit on interchange fees based on the actual cost of processing transactions.
The Fed’s 2011 Regulation II implemented this by capping most debit transactions at 21 cents plus 0.05 percent of the transaction amount, with an extra cent allowed for fraud prevention costs.
However, merchant groups have long argued the cap remains too high because the Fed included costs beyond those explicitly allowed by the law.
For their part, banks and card networks have defended it as necessary to cover operating expenses and maintain payment system security.
In its case against the Fed, Corner Post argued that the board’s revised rule improperly allowed issuers to recover certain expenses. These included fixed authorisation, clearance and settlement (ACS) costs, transaction-monitoring costs, issuer fraud losses, and network processing fees – cost categories that merchants argue were explicitly excluded by members of the US Congress.
The court ultimately came down in the plaintiff’s favour, finding that the statute permits consideration only of incremental ACS costs directly tied to a specific electronic debit transaction.
Drawing on statements from Senator Richard Durbin (D-IL), the principal author of the amendment, the court concluded that the legislative history clearly confirmed that broader costs should not be included in the “reasonable and proportional” analysis.
The judge also rejected the Fed’s approach of applying a uniform cap to all covered issuers, saying it is not compatible with the original legal text.
The court noted that although the Fed’s board may have some discretion to group similarly situated issuers and transactions for safe harbour caps, it cannot ignore the statute’s express directives.
Amici curiae in the case included the Bank Policy Institute, the Clearing House Association, the Merchant Advisory Group, the Retail Litigation Center and the National Federation of Independent Business.
The court declined to consider some amici concerns, particularly from large banks, that lower caps could result in unconstitutionally confiscatory rates, noting that the Eighth Circuit had already rejected similar arguments in earlier litigation.
Who are the winners?
This ruling could have significant consequences, with those most jubilant likely to be retailers, restaurants, fuel stations and other merchants that are subject to paying interchange fees.
A stricter reading of the Durbin Amendment, limiting the costs issuers can recover, could lead to lower debit interchange caps in a future rule.
Trade associations representing the merchant industry, such as the Merchant Advisory Group and the National Federation of Independent Business, which supported Corner Post, will see the ruling as a clear legal victory after years of lobbying against the Fed’s broader cost allowances.
Small businesses that accept debit cards also stand to gain. These businesses feel the burden of interchange fees most acutely, as they have less leverage to negotiate processing costs.
Any future rule that ties caps more closely to actual per-transaction costs should benefit them proportionally.
Who are the losers?
On the other hand, as with interchange intervention elsewhere, whether that be in the EU, UK, or places like Australia, it is the large debit card issuers that have lost out in this ruling.
Banks such as JPMorgan Chase, Bank of America and Wells Fargo are likely to lose revenue if the interchange ceiling is tightened.
Card giants Visa and Mastercard are also in a weaker position – although the Durbin Amendment regulates issuers rather than networks directly, the card schemes’ debit business relies heavily on percentage-based fees linked to interchange.
A tighter cap could reduce total transaction revenue flowing through their networks, erode their leverage with merchants in pricing disputes and strengthen calls for more network routing competition.
The card schemes do not face an immediate regulatory rewrite, but the court’s emphasis on a strict, cost-based cap signals an unfavourable direction of travel.
If the ruling survives appeal, the balance of negotiating power in US debit payments will shift slightly towards merchants.
However, change is not imminent, and the current rules will remain in place in the short term, meaning that any real financial effects will depend on the outcome of the appeal.
