Court ruling makes lower swipe fees likely, not imminent

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• Key insight: New court precedents have made defending the Fed’s 2011 rule an uphill battle, but the Fed still has a lot to fight for: namely its discretion in crafting future policies. 
• Expert quote: “They’re already moving towards a lower cap. What I expect them to actually really defend is their discretion over the methodology and which costs count. Updating the number, that’s one thing, but accepting a judicial interpretation that would substantially narrow its regulatory authority is quite another.” —John Popeo, president of The Gallatin Group

The Federal Reserve has been ordered to lower the cap it imposes on debit interchange fees, but don’t expect it to start rewriting its policies anytime soon.

At least one more court must opine on a lawsuit challenging whether or not the Fed’s Regulation II is a faithful interpretation of its authorizing law. Then all parties must wait to see if the Supreme Court decides to weigh in. 

If the courts continue to rule against the Fed’s current interchange cap — an increasingly likely outcome given recent legal precedent on administrative discretion — whatever replaces it will be more restrictive on debit card-issuing banks with at least $10 billion of assets. But the ramifications for banks could run even deeper if regulators can no longer rationalize regulatory laws in their favor. 

Because of this, some legal and regulatory analysts expect the Fed to emphasize the process that went into crafting Reg II rather than its ultimate result. John Popeo, a former lawyer for the Federal Deposit Insurance Corp. and president of regulatory advisory firm The Gallatin Group, noted that the Fed was already prepared to lower the cap, putting out a proposal to do so in 2023.

“They’re already moving towards a lower cap,” Popeo said. “What I expect them to actually really defend is their discretion over the methodology and which costs count. Updating the number, that’s one thing, but accepting a judicial interpretation that would substantially narrow its regulatory authority is quite another.”

Last week, the Eighth Circuit Court of Appeals rendered its decision in Corner Post v. Federal Reserve Board, a 2021 lawsuit challenging the Fed’s 2011 rule implementing the Durbin Amendment to the Dodd-Frank Wall Street Reform and Consumer Protection Act. The court found that Reg II overstepped the boundaries assigned by the law.

Judge David Stras, writing for the three-judge panel, said the Fed deviated from the statute by factoring non-transaction-specific costs into the cap. He argued that costs are either variable or fixed and, by the letter of the law, issuers could not recoup their fixed cost investments through interchange fees. Yet, he said, the Fed’s approach of a 21-cent base fee, a 0.05 basis point ad valorem charge and an optional 1 cent adjustment for fraud-loss mitigation did just that.

“Among the non-transaction-specific costs it included were fixed costs related to authorization, clearance, and settlement; network processing fees; transaction-monitoring costs for fraud prevention, and fraud losses,” Stras wrote. “The clearest sign of regulatory drift was the flat 21-cent cap because it applied to every transaction, no matter its cost.”

The decision upheld the lower court’s ruling, saying, in no uncertain terms, that the central bank must “come up with a fee structure that reflects the statute Congress wrote,” namely one that omits costs not tied to specific transactions, as the Durbin Amendment instructs.

“The Fed is simply supposed to do what it’s instructed to do. The Fed took significant liberties [under Durbin], but now it’s being brought to account,” said Eric Grover, principal at Intrepid Ventures, a payments consulting firm. “We’re going to see some foot dragging, but ultimately we’re going to see the law implemented as intended.”

Former Fed General Counsel Scott Alvarez said the Eighth Circuit’s ruling might indicate how other administrative law cases will be handled. 

Alvarez pointed to two recent Supreme Court decisions that have set critical precedent for the interchange fee battle. The first is an earlier iteration of Corner Post v. Fed, which expanded the statute of limitations for challenging regulatory changes, and the second is Loper Bright Enterprises v. Raimondo, which put an end to the decades-old practice of courts granting agencies broad deference to interpret ambiguous legislation.

“The combination of Loper Bright and Corner Post means judges get to decide what they think is best, which will lead to many different interpretations,” Alvarez said, noting that the Eighth Circuit decision rested on a black-and-white interpretation of the Durbin Amendment that could reasonably be deemed open to interpretation. “It’s a fallacy to say there is only one correct reading of a statute, there are many ways to read them.”

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Alvarez said this new legal environment could result in less regulatory clarity and heavier involvement of courts in rulemaking processes. 

“You could end up with three different courts interpreting the same statute three different ways. I don’t see how anybody lives with that,” he said. “Different readings will certainly keep the Supreme Court busy.”

Rather than move to swiftly revise its interchange rule based solely on last week’s decision, Alvarez said the Fed is likely to wait for the result of another lawsuit, Linney’s Pizza v. The Federal Reserve Board, which is winding through the Sixth Circuit Court of Appeals. 

In that case, the plaintiff is also claiming that the Fed set the debit interchange cap too high. But, unlike in Corner Post, the district court in this case ruled in favor of the Fed last year, saying the central bank met its legal obligations during the rulemaking process — even in light of the Loper Bright shift away from broad deference. 

If the Fed wins again, the split between the Sixth and Eight circuits would put pressure on the Supreme Court to take up the issue. Given that the composition of the court has not changed since the Loper Bright decision, there is a strong chance it sides with the Eighth Circuit. But, Alvarez noted, the court would also have to contend with a 2015 decision from the D.C. Circuit Court of Appeals, which swatted down an earlier attempt to challenge the legality of the current interchange cap. 

Alvarez said the best course of action for the Fed is to see exactly what framework it will be operating under before committing time and resources to a new rule. 

“I would tend toward not wanting to go forward with the rulemaking with the difference of the two opinions. I’d appeal to the Supreme Court first,” he said. “If the Eighth Circuit prevails, the Fed’s 2023 proposal totally has to be abandoned and it has to start from scratch. If the DC Circuit prevails, it could move forward with what it has already.”

If the Eighth Circuit ruling carries, the Fed could not simply revert to its 2023 proposal, which would have lowered the base fee to 14.4 cents, dropped the ad valorem rate to 0.04 basis points and raised the fraud adjustment to 1.3 cents. Alvarez said the central bank would need to take an entirely different approach, one that hues closer to the actual costs incurred by banks at the time of processing. 

One of the issues the Fed faced in 2011 is that per-transaction costs vary widely from bank to bank. That variance has only been exacerbated over time. Many smaller issuers — including many above the $10 billion exemption cut off — rely on third-party core processors to authorize, clear and settle transactions for them. Because these services are external, it is easy to draw the line between expenses that are related to debit transactions and those that are not.

The largest debit card issuing banks in the country are more likely to build out their own payments infrastructure. This approach generates a lot of up-front costs that dwindle to virtually nothing when spread out over time and across billions of transactions per year.

In 2024, JPMorganChase, Bank of America and Wells Fargo each processed more than half a trillion dollars of debit card transaction volume, spread out across more than 32 billion purchases collectively. According to the Fed’s latest national payments volume report, that would translate into roughly a third of the non-prepaid debit card activity from that year. If the cap is revised to reflect the actual per-transaction costs incurred by these banks, not only would they be forced to offset their investment costs in other ways, they would also lose a significant chunk of revenue.

Last year, Wells Fargo processed $530 billion of debit card purchases across 10.5 billion transactions, according to its 2025 annual report, an average purchase value of just over $50. Based on those figures — which might overstate the covered activity by the bank — the current cap would translate to nearly $2.6 billion of fee revenue. The Fed’s 2023 proposal would drop that to less than $1.9 billion. A base cap of 1 cent, keeping the current ad valorem and fraud adjustment rates, would drop it to around $470 million, a reduction of more than 80%.

“The debit economics of the large debit issuers will be destroyed, effectively,” Grover said. “The largest issuers are not going to be able to sustain fee free accounts for consumers that have more modest relationships with them. The notion of free checking with all that entails could go away. We’ll also see the delta between the covered programs and the exempt programs hugely magnified.”

Interchange oversight was not a responsibility the Fed sought. It did not request it during the drafting of Dodd-Frank or the Durbin Amendment. But, it was assigned it all the same, with lawmakers noting that the Fed’s expertise as an operator of its own payments system. Yet, whether or not the Fed wanted the authority, it isn’t going away. 

In other recent cases, such as the banking industry lawsuit over stress testing, the Fed has been willing to accept the changing jurisprudence and opt for reform over litigation. But the matter of interchange is different. Not only does it bring into question the Fed’s discretion, it also positions it between two formidable interest groups — banks and retailers — who are unlikely to settle for détente. 

“The Fed is between a rock and a hard place. The banks are on one side and they do not like the Durbin Amendment, the merchants are on the other side and they love it. Those are two well represented groups and there’s no appeasing one without upsetting the other,” Alvarez said. “The Fed has to do what it thinks is right, as it always does, but it’s not going to lean for or against the banks for any reasons nor is it going to lean for or against the merchants for any reason. There is no easy way out of this one.”