A North Dakota judge has fired the starting gun on what could become the biggest reset of U.S. debit card economics since the Durbin Amendment itself, 14 years on — as an order came down vacating the Federal Reserve’s 2011 swipe fee cap.
And though there’s a pause in place keeping things status quo while other court battles wind on over interchange economics, the Wednesday (Aug. 6) decision will wind up teeing up a regulatory, legislative and commercial scramble worth billions.
At a high level, U.S. District Judge Daniel M. Traynor tossed the Fed’s Regulation II — rules that since 2011 have limited debit interchange to 21 cents plus 0.05% per transaction — finding the central bank “exceeded its authority” when it let issuers recover fraud prevention and other costs. He stayed the action to give the Federal Reserve time to appeal, but retailers nonetheless celebrated a “major win.” Banks, on the other hand, are taking issue with the ruling, contending that the net impact may be that the funding of innovation, for new products and services, and data security, may be curtailed.
Delving Into the Ruling
The vase, Corner Post v. Board of Governors of the Federal Reserve System, arose after the Supreme Court last year allowed the tiny North Dakota convenience store to sue despite the general six‑year statute of limitations.
Judge Traynor’s 44‑page order turns on statutory construction. The Durbin Amendment directs that any interchange fee be “reasonable and proportional to the incremental cost” of authorization, clearance and settlement. The Fed, however, wrote a three‑part formula that also recouped certain fixed and fraud‑prevention expenses. Traynor concluded that the statute “creates two—and only two—allowable cost buckets,” and that inserting a third unlawfully shifted billions from merchants to issuers.
“Congress did not hide an ‘easter egg’ of a third cost category in the Durbin Amendment, particularly when those additional costs would benefit banks at the expense of merchants and consumers,” the ruling stated.
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After applying Chevron deference in the rule’s original 2012 D.C. Circuit challenge, the court noted, the Supreme Court’s June decision to overrule Chevron (in a case captioned Loper Bright and Relentless) reinforces the need for “textual fidelity.”
Even before those cases, Traynor wrote, plain meaning was dispositive: “[T]he Board cannot legislate through regulation what Congress declined to enact.” And elsewhere in the ruling, the judge set forth the argument that “In short, Regulation II expanded the world of allowable costs from a limited set explicitly mandated in the Durbin Amendment to ‘any cost that is not prohibited.’”
Status Quo — for Now?
Vacating the rule but staying his order protects all sides from immediate market disruption while the Eighth Circuit (and, ultimately, perhaps the Supreme Court) weighs in.
Retail groups were quick to claim victory. In a statement emailed to PYMNTS on Thursday (Aug. 7) in the wake of the ruling, National Retail Federation Chief Administrative Officer and General Counsel Stephanie Martz said that “as merchants have argued for 14 years, the Fed’s broad attempt to allow big banks to essentially charge rent-seeking fees for debit card transactions is illegal.”
Martz said in the statement, “If the Durbin Amendment is to mean anything, it’s that there are specific costs that banks can recover from merchants, and costs that they categorically cannot recover from merchants. This court was correct in discerning this distinction. And the court was correct in requiring the Fed to set rates based on individual transactions, not a blended average. We fully expect this decision to be sustained on appeal, and to save merchants hundreds of millions of dollars.”
In a separate email to PYMNTS, also on Thursday, a joint statement from the Bank Policy Institute and The Clearing House stated that “we are severely disappointed in the Court’s interpretation of the Durbin Amendment. 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.”
There are signs that the legal jousting is not over in the Dakotas, given the fact that the joint statement also said, “We will 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.”
The Fed’s Latest Efforts
The decision arrives as the Fed is already proposing a 30% reduction in the cap based on more recent cost studies; Traynor’s order could force the Board either to accelerate that rulemaking or go back to square one with a more restrictive methodology.
All told, and as estimated here by the Fed interchange fees run to the billions of dollars, as much as $31 billion; removing or sharply cutting that revenue stream would spur repricing of checking accounts, greater reliance on overdraft and NSF fees, or pushes into credit products where interchange remains uncapped.
Looking Forward
Near‑term, stakeholders should watch three tracks: 1) whether the Fed seeks an immediate administrative stay from the Eighth Circuit; 2) how major networks such as Visa and Mastercard adjust network‑set rates embedded in hundreds of issuer contracts; and 3) whether Congress revisits Durbin in light of Chevron’s demise to clarify allowable cost recovery — potentially tying the issue to the broader debate over credit‑card interchange and the Credit Card Competition Act. For FinTech debit issuers, especially those operating under the $10 billion Durbin exemption, competitive dynamics could flip if big‑bank pricing rises.
The economics of caps have been analyzed in the past: In “The Impact of the U.S. Debit Card Interchange Fee Caps on Consumer Welfare: An Event Study Analysis,” economist David Evans wrote that banking customers “lost more on the bank side than they gained on the merchant side,” by as much as $25 billion in discounted value dollars, as a result of the interchange fee cap initially set in place by the Durbin Amendment back in 2011.
And the Fed itself wrote in 2017 in this study that “banks subject to the cap raised checking account prices by decreasing the availability of free accounts, raising monthly fees and increasing minimum balance requirements, with different adjustment across account types.”
We will continue to track the appeals docket, the Fed’s rulemaking calendar and how payments stakeholders — from core processors to neobanks — re-price the everyday swipe.
