After a Court Ruling the Durbin Debit Cap Is Poised for a Rewrite – Digital Transactions
The Federal Reserve is now required to rewrite the key interchange limits included in a controversial 15-year-old debit card rule following a federal appeals court decision Monday striking down an interchange cap the Fed established in 2011. The Fed could still appeal the ruling to the U.S. Supreme Court.
Interchange, the fee merchants pay to card issuers on each debit or credit card transaction, has been a highly contentious matter for decades, pitting merchant groups against financial institutions and consuming resources in lobbying either for or against rate caps.
The decision by a three-judge panel of the U.S. Circuit Court of Appeals for the 8th Circuit upholds a challenge brought by Corner Post, a 7-year-old truck stop and convenience-store operator in North Dakota, which challenged the Fed’s 21-cent interchange cap on debit as too high in light of issuers’ actual expenses. The Fed’s cap followed the 2010 Durbin Amendment, which directed the Fed to place limits on debit interchange. Issuers with less than $10 billion in assets are exempt from the regulation.
The Fed has the option to appeal the latest decision to the Supreme Court, but for now merchants and their trade groups are celebrating the verdict following years in which they have argued the Fed’s interchange-fee limit was excessive. A key part of their argument is that the Fed took account of fixed costs and expenses not specific to the transaction, resulting in a fee cap that was set too high. Merchant groups for years have argued that interchange amounts to merchants’ largest expense aside from labor.
The latest decision “confirms what merchants have said for more than a decade…[that] the current rate lets banks collect billions of dollars a year more from stores and their customers than the law ever meant them to have—far more than it takes to cover their costs and earn a healthy profit,” says Doug Kantor, general counsel for the National Association of Convenience Stores, in a statement.
Observers see the latest development as an even bigger win for merchants than many might realize. “I expect the decision will ultimately stand, forcing the Fed to rewrite Regulation II and impose much stricter debit interchange caps under the Durbin Amendment,” says Eric Grover, proprietor of Intrepid Ventures, a payments consultancy. Regulation II is the set of rules from the Fed that implement the Durbin Amendment. Retail groups have long argued that the Fed’s interpretation of the amendment has been too favorable to issuer interests.
But the impact on issuers will be far from subtle, Grover warns. “If Corner Post stands, it will devastate the debit economics of issuing colossi like Bank of America, Chase, and Wells Fargo,” he warns in an email message to Digital Transactions News. The damage, however, will prove selective, he predicts, favoring a number of payments players.
“Conversely,” Grover says, “[the appeals court’s ruling] will further advantage Capital One (now running its debit program on the Durbin-exempt three-party Discover network) alongside PayPal (the Venmo Card), Block (the Cash App Card), and the many neobanks that partner with community banks under the $10 billion asset threshold to reap much higher market-interchange fees. Those exempt players will therefore be able to take significant market share—a win for both them and consumers.”
The bottom line, Grover argues, is that “large retail banks are going to rue the day they failed to mount a full-throated effort to repeal the Durbin Amendment.”
