Merchants persuaded a federal appeals court to throw out the Federal Reserve’s debit-card fee cap. They might want to hold the applause until they see its replacement. A ruling aimed at the Fed’s arithmetic could leave room for a higher cap—and a fuller accounting of what consumers get for those fees.
In Corner Post, Inc. v. Board of Governors of the Federal Reserve System, a panel of the 8th U.S. Circuit Court of Appeals affirmed a decision vacating the Federal Reserve’s interchange-fee cap under Regulation II. Merchants pay interchange fees to the banks that issue their customers’ debit cards. The rule capped them at 21 cents per transaction, plus an allowance for fraud losses and an additional penny for qualifying fraud-prevention measures.
Writing for the panel, Judge David Stras concluded that the Fed improperly included fixed costs that weren’t specific to individual transactions. The Durbin Amendment, he explained, requires the Fed to consider the “incremental cost” of processing a particular transaction. The decision carries added significance after Loper Bright Enterprises v. Raimondo, which ended the practice of deferring to reasonable agency interpretations of ambiguous statutes.
But rejecting the Fed’s cost calculation doesn’t settle how high fees may go. As the International Center for Law & Economics (ICLE) argued in its amicus brief in Linney’s Pizza, LLC v. Board of Governors, a parallel case before the 6th U.S. Circuit Court of Appeals, the Durbin Amendment gives the Fed discretion to determine what fees are “reasonable and proportional.” Even under the 8th Circuit’s restrictive reading, that language may leave room for a much higher cap.
That inquiry should account for how payment networks work. They serve two groups—merchants and consumers—and benefits that attract consumers also make the network more valuable to merchants. ICLE’s argument offers the Fed a legal basis for recognizing those benefits when setting the cap. The court has ordered the agency to reconsider the costs. What those fees buy deserves a look, too.
The Swipe at the Fed
The path forward starts with what the 8th Circuit found wrong with the Fed’s approach. The Durbin Amendment, part of the Dodd-Frank Wall Street Reform and Consumer Protection Act, requires debit-card interchange fees to be “reasonable and proportional to the cost incurred by the issuer with respect to the transaction.” The issuer is the bank that provides the customer’s card.
The statute also tells the Fed which costs to count. It must consider the “incremental cost” of authorizing, clearing, or settling a particular transaction—the steps that approve a payment and move the money between banks. It must exclude costs that aren’t specific to a particular transaction.
When it adopted Regulation II, the Fed treated certain fixed processing costs, network processing fees, transaction-monitoring costs, and fraud losses as transaction-specific. It relied on Chevron deference, the doctrine that allowed agencies to choose among reasonable interpretations of ambiguous statutes.
In Corner Post, the 8th Circuit rejected that approach. Applying Loper Bright, the panel read the statute independently and interpreted “incremental cost” to mean marginal cost—the extra expense of processing one more transaction. The Fed, the court held, had failed to distinguish that expense from fixed or other costs that weren’t specific to an individual transaction. Its uniform 21-cent cap therefore rested on the wrong cost calculation. The panel affirmed the lower court’s decision vacating it.
For the merchants backing the litigation, the next step seems obvious. Count only the direct expense of processing a swipe, and slash the cap accordingly. But that conclusion skips over both the discretion Congress gave the Fed and the economics of the payment networks it regulates.
Proportional Doesn’t Mean Identical
The 8th Circuit narrowed which costs the Fed may count. It left intact the central statutory command to assess whether fees are “reasonable and proportional” to those costs. As the court itself explained:
Make no mistake, debit-card interchange fees do not have to exactly match marginal cost. The word “proportional,” after all, does not require perfection… The Federal Reserve is free to use a proxy, perhaps even average variable cost, if it bears a “reasonable” relationship to the marginal 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. Not just pick a number and hope it is close enough for government work.
Congress could have required fees to equal the incremental expense of processing each transaction. Instead, it chose “reasonable and proportional,” language that calls for judgment beyond mere arithmetic.
The merchants’ reading—that fees must exactly match those processing costs—would strip those words of independent meaning. That runs into the canon against surplusage, the rule that courts should interpret statutes so that every word has meaning.
The Fed must therefore distinguish the costs the statute permits from those it excludes. But a smaller cost baseline needn’t produce an equally small fee cap. The Fed still has room to set a higher fee, provided it can explain why that fee bears a reasonable and proportional relationship to the permitted costs.
Accounting for the Consumer Benefits of Interchange Fees
To judge whether a fee is “reasonable and proportional,” the Fed must understand what it accomplishes. As the Supreme Court recognized in Ohio v. American Express, payment networks serve two connected groups. Consumers value cards that more merchants accept, and merchants value cards that more consumers carry. Economists call these “indirect network effects.”
Networks must attract both groups, which can mean charging one side more to help fund benefits for the other. Historically, interchange fees helped card-issuing banks offer debit-card rewards, free checking, and low minimum-balance requirements. Those benefits attracted consumers, making card acceptance more valuable to merchants.
Regulation II changed that calculation. A substantial body of research, including studies by the Fed’s own economists, documents how banks responded to the cap. Banks subject to it sought to replace lost interchange revenue by raising monthly account fees and minimum-balance requirements, while reducing access to free checking. The savings had to come from somewhere.
These changes hit low-income households particularly hard, pushing some out of the banking system or toward costly alternatives such as check-cashing services. Meanwhile, there’s little empirical evidence that merchants offset those losses by passing their interchange savings along through lower retail prices.
The 8th Circuit’s opinion therefore doesn’t require the drastic fee cuts the plaintiffs seek. The economics of two-sided payment networks gives the Fed a legal framework for setting a higher cap when it revisits the rule. The agency can follow the court’s order by limiting its cost baseline to the incremental expense of authorizing, clearing, and settling individual transactions. Then, when determining what fee is “reasonable and proportional” to those costs, the Fed can exercise its delegated authority to account for the consumer benefits those fees help fund.
As ICLE’s amicus brief in Linney’s Pizza puts it:
To effectively make this judgment, the Board could consider that debit card networks are two-sided platforms and that interchange fees allow for the merchants on one side of the platform to subsidize benefits to consumers on the other…
In recognition of the benefits to consumers enabled by interchange fees, the Board could have determined that a higher interchange fee is justified because it is “reasonable and proportional” to the cost incurred by the issuer in a specific transaction. The Board could have even published standards, enforceable ex post, for what a reasonable percentage for an interchange fee could be, considering consumer benefits that they enable, rather than setting any percentage themselves.
Under that approach, the Fed could establish standards and assess compliance after the fact, rather than prescribe a single rate itself. Either way, transaction-specific costs would remain the statutory anchor, while consumer benefits would help inform the judgment about a reasonable fee. Counting the costs is essential but understanding what consumers get for them belongs in the analysis, too.
What Comes Next for Interchange Fees
Next comes the 6th Circuit’s decision in Linney’s Pizza. If it disagrees with the 8th Circuit on which costs the Fed may count, the resulting circuit split could put the issue before the Supreme Court. If it agrees, the Fed will face another judicial directive to rebuild its rule without fixed or other costs that aren’t specific to individual transactions.
Either way, rejecting the Fed’s cost calculation doesn’t dictate another cut in interchange revenue. The Durbin Amendment’s “reasonable and proportional” standard leaves room for the agency to account for how payment networks serve merchants and consumers together.
Pushing interchange fees below market rates saves merchants money, but consumers would pay for those savings through higher bank fees, lost rewards, and fewer free checking accounts. The Fed can use its delegated discretion to account for those consumer benefits while following the 8th Circuit’s ruling. Doing so would help ensure that a merchant-driven regulatory victory doesn’t leave everyday consumers footing the bill.
