The Federal Reserve must recalculate its 21-cent cap on debit card swipe fees after an appeals court found the 2011 regulation setting the cap violated the federal law governing the transfer of electronic funds. The recalculation may end up reducing the amount large banks may charge for debit card transactions, but the three-judge panel that issued the decision has mandated that the current cap remain in place to give the Federal Reserve the opportunity to seek an en banc rehearing.
The decision in Corner Post, Inc. v. Board of Governors of the Federal Reserve System was issued by the U.S. Court of Appeals for the Eighth Circuit on Oct. 26. In its ruling, the court concluded that the Federal Reserve’s regulation imposing a cap of 21 cents per transaction plus 0.05% of the transaction’s value on debit card interchange fees, often known as “swipe fees,” did not conform with the statute requiring it to cap the fees based on the cost of processing a debit card transaction.
The swipe fees banks assess on debit card transactions are a fee most Americans pay daily. In 2023 alone, U.S. consumers used their debit cards more than 100 billion times for transactions that totaled $4.7 trillion. Because of the sheer number of transactions, reducing the 21-cent cap on swipe fees could boost revenue for retailers, who often pay the fee on behalf of debit card users, but it could reduce bank revenue from those transactions.
The Eighth Circuit’s decision is also notable for its reliance on the U.S. Supreme Court’s landmark 2024 decision in Loper Bright Enterprises v. Raimondo. In that ruling, the Supreme Court concluded that the Administrative Procedure Act (APA) gives courts the power to interpret ambiguous federal statutes, not federal agencies. In Corner Post, the Eighth Circuit found it was not required to rely on the Federal Reserve’s interpretation of an ambiguous statute and ordered the agency to recalculate a cap in a manner closer to what Congress laid out.
No Immediate Changes to Cap
The Eighth Circuit’s ruling affirms a decision by a North Dakota federal judge vacating the Federal Reserve’s longstanding 21-cent cap on fees a merchant’s bank must pay the bank that issued the debit card each time a customer uses it to pay for a transaction. But in a footnote to its decision, the Eighth Circuit said its ruling only takes effect when it issues a mandate, which will happen seven days after the deadline for filing a petition for rehearing or the court issues an order denying one. Until then, the current cap remains in place.
The named plaintiff in the case is the Corner Post, a truck stop and convenience store in North Dakota. The business joined a lawsuit brought against the Federal Reserve in 2021. The plaintiffs claimed the Federal Reserve failed to comply with the Electronic Fund Transfer Act’s Durbin Amendment. That provision directed the Federal Reserve to consider the incremental costs of authorizing, clearing, or settling each debit card transaction while excluding other costs when setting the cap. Instead, the agency set a uniform cap that included certain fixed costs, but did not adequately distinguish between the categories.
The Supreme Court has already addressed other issues related to the case, deciding in 2024 that the Corner Post’s claim under the APA was timely, despite the six-year statute of limitations that applies to lawsuits against the U.S. While more than six years had passed between the Federal Reserve issuing the regulation and the challenge being filed, the high court found that the statute of limitations does not begin to run until a plaintiff is injured by a final agency action. The case was eventually remanded to the trial court for further proceedings.
Fed Sets Cap under Dodd-Frank
The Durbin Amendment was part of the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act, enacted as part of Congress’s efforts to reform the U.S. financial system and prevent a recurrence of the 2008 financial crisis. Under the amendment, the Federal Reserve was authorized to cap the debit card interchange fees charged by banks with assets of more than $10 billion.
Before Dodd-Frank, networks and banks freely negotiated interchange fees. However, fees were increasing, and Congress stepped in with the Durbin Amendment, which authorized the Federal Reserve to issue regulations and set standards to keep fees reasonable and proportional to the costs incurred by debit card issuers. It also required the agency to consider the costs the bank incurred in authorizing, clearing, or settling an electronic debit transaction. The agency could not consider other costs not specific to the transactions.
After a lengthy notice-and-comment period, the Federal Reserve adopted a regulation in 2011 that capped interchange fees at 21 cents per transaction, plus 0.05% of the transaction’s value to compensate banks for fraud losses. Debit card issuers that met certain fraud-prevention standards are allowed to charge an additional penny per transaction.
The Eighth Circuit found that, in issuing the regulation, the Federal Reserve performed a “regulatory two-step.” In the first step, the agency considered all costs specific to a particular debit transaction when setting the cap on interchange fees. In the second, the Federal Reserve decided the statute was ambiguous, which allowed it to include fixed costs as incurred in the course of the transactions.
Regulation Not Based on Incremental Costs
The key question in the case was whether the Federal Reserve set the cap on interchange fees based on the issuers’ incremental costs. The Eighth Circuit noted that the Federal Reserve never decided what those costs were and instead chose a blanket 21-cent cap. The agency's only adjustments were based on the transaction’s value and the issuer’s compliance with fraud-prevention standards.
According to the court, incremental costs are well understood in economics, and the phrase is commonly used interchangeably with “marginal costs.” Economics textbooks say that marginal cost is the increase in the total cost arising from producing one additional unit. For the purposes of the cap on interchange fees, the court found that the marginal cost was the amount added to a cardholder’s bank’s total cost by one additional debit card transaction. The Federal Reserve may consider only that cost when setting the cap.
The Eighth Circuit explained that the cap on debit-card interchange fees is not required to be an exact match for the bank’s marginal costs. It said the Federal Reserve was free to use a proxy for marginal costs, so long as it bears a reasonable relationship to the costs incurred by cardholder banks in processing debit-card transactions.
“At a minimum, however, it must sort the costs into those that are transaction-specific and those that are not,” the court said. “Not just pick a number and hope it is close enough for government work.”
Ruling Will Have an Uncertain Impact
Because the Eighth Circuit essentially told the Federal Reserve to show its work when it resets the cap on debit-card interchange fees, the ruling's impact is uncertain. It is not clear whether the new cap will be lower than its current level and, if so, by how much. The plaintiffs filed suit based on their contention that the current cap is higher than the banks’ incremental costs for debit card transactions, but the decision does not address the specifics of how the incremental cost is to be calculated. When the Federal Reserve comes up with a number, it is likely that additional litigation will follow and the courts will be called in to double-check the agency’s math.
Significant questions also remain about when retailers would get relief from the current transaction cap, which remains in place. The Eighth Circuit’s decision does not take effect until seven days after the deadline to seek rehearing, which is usually 45 days. It also goes into effect when the court rejects a petition for rehearing, but there is no clear timeline for that. If the Eighth Circuit opts to rehear the case, the court would likely issue a stay that would leave the current cap in place until the matter is resolved, which could take a year or longer.
