For more than a decade, bankers and merchants have operated under the Fed’s 21-cent cap on debit card interchange fees. Now, that cap could be on its way out after the Eighth U.S. Circuit Court of Appeals upheld a ruling that found the rate was set too high. The decision could reshape how banks are compensated for debit transactions, with implications for merchants that pay the fees and banks that collect them.
The ruling centers on the Durbin Amendment, which requires the Fed to set debit interchange fees at a level “reasonable and proportional” to banks’ costs. The court found that the Fed went beyond those requirements when it established the current cap, factoring in expenses such as fraud losses, transaction monitoring, and network processing fees.
“The Durbin Amendment was meant to be a compromise for both banks and merchants that would be mediated by the Fed,” said Don Apgar, Director of Merchant Payments at Javelin Strategy & Research. “Banks could continue to collect fees for operating debit card programs, but big banks over $10 billion in assets would be limited to recouping their operating costs.”
What Happens Next?
The law directed the Fed to consider banks’ incremental costs in setting the cap. Instead, the agency also factored in expenses such as fraud losses, transaction monitoring, and network processing fees. The process took nearly a year of research, analysis, and public input.
Now, the Eighth Circuit’s ruling directs the Fed to establish “a fee structure that reflects the statute Congress wrote.” The agency’s next move remains unclear. It could appeal the decision or restart the process of evaluating banks’ costs.
Corner Post, the North Dakota truck stop and convenience store that filed the original lawsuit in 2021, suggested that the Fed adopt a tiered system based on factors such as banks’ asset size, transaction volume, and geography.
A Different Landscape
The case also highlights an irony in the debit card market. Smaller banks, which are exempt from the Durbin cap, tend to serve more toward rural areas, while larger, regulated banks have a greater presence in major metropolitan markets.
In fact, roughly 75% of the debit cards accepted by Corner Post aren’t subject to the cap. Visa sets the interchange fees for exempt banks at 15 cents per transaction, plus 0.80% of the purchase amount.
“What’s interesting is the convenience store that initiated the lawsuit is claiming to be harmed by the regulated debit fee but not the unregulated fee,” Apgar said. “When you compare those two fees, the breakeven is about $8. That means the regulated fee is less expensive for the merchant on all transactions except those under $8.”