Fed loses debit card cap appeal

A federal appeals court has determined that the Federal Reserve made an incorrect decision regarding the rules for establishing a cap on debit card transaction fees. On Monday, a three-judge panel from the Eighth Circuit U.S. Court of Appeals upheld a previous ruling from last year that vacated the central bank's existing limit of 21 cents per transaction. This ruling is seen as a significant win for merchants who have long contested payment card swipe fees.

The plaintiffs argued that the Federal Reserve System's Board of Governors should have established a debit card interchange standard that only considers the marginal costs associated with a transaction, rather than the fixed expenses of the issuer's overall operations. The court concluded that any costs not directly related to a specific electronic debit transaction should not factor into the fee cap set by the Fed, aligning with the intent of Congress in 2010 when the Durbin Amendment was added to the Dodd-Frank Wall Street Reform and Consumer Protection Act.

The appeals court noted that the Fed's current structure for debit card fees encompasses more than just the marginal cost of each transaction, failing to adhere to the legislative intent of the Durbin Amendment. Specifically, the ruling highlighted that the Fed's cap included fixed costs associated with transaction authorization, clearance, settlement, processing fees, fraud prevention costs, and losses due to fraud.

The judges emphasized that it is clear the Federal Reserve should only consider marginal costs when setting debit card interchange fees, stating, "It does not take much detective work to figure out that the Federal Reserve 'shall . . . consider' marginal costs in setting debit-card interchange fees, but not fixed costs." They also clarified that while interchange fees do not need to match marginal costs perfectly, they must maintain a reasonable relationship to those costs.

Under Regulation II, the Fed established a cap on debit card swipe fees in 2011, setting it at 21 cents plus 0.05% of the transaction value, with an additional one-cent allowance for fraud prevention measures. This cap is reviewed every two years and is applicable only to banks and financial institutions with over $10 billion in deposits. In October 2023, the Fed proposed a reduction of the cap by approximately 30% to 14.4 cents, but there has been no further action on this proposal since then.

A spokesperson for the Federal Reserve declined to comment on the ruling or the status of the proposed fee changes. The appeals panel stressed that the Fed must accurately categorize costs into those specific to transactions and those that are not, rather than simply selecting a figure that seems adequate.

The lawsuit originated in April 2021 when Corner Post, a convenience store and truck stop in Watford City, North Dakota, filed against the Fed to seek a reduction in debit card transaction fees. U.S. District Judge Daniel Traynor ruled against the Fed's fee regulations in August 2025, leading to the appeal. Following his confirmation to the Eighth Circuit court in July, Traynor was not part of the panel that ruled on the Fed's appeal.

The Merchants Payments Coalition praised the court's ruling, viewing it as a victory for both merchants and consumers. Doug Kantor, general counsel for the National Association of Convenience Stores, stated in a press release, "Two courts have now agreed that the current rate lets banks collect billions of dollars a year more from stores and their customers than the law ever meant for them to have." He called for the Fed to revise its debit-fee regulation to align with legal standards and alleviate some of the cost pressures on consumers.

In contrast, banking and payment organizations, including the American Bankers Association and America’s Credit Unions, expressed their disappointment with the Eighth Circuit's decision. In a joint statement, they criticized the ruling, asserting that for over a decade, large corporations have benefited from the Durbin Amendment while failing to pass on savings to consumers. They also highlighted an ongoing case regarding debit card fees in the Sixth Circuit, Linney’s Pizza vs. Federal Reserve, where a federal court had previously sided with the Fed’s rules.

The banking groups concluded their statement by reminding stakeholders that the recent decision is not the final word on these matters, indicating the ongoing debate surrounding debit card fee regulations.