A U.S. judge has vacated the Federal Reserve’s interchange or “swipe” fee regulation that capped the amount banks charge merchants for processing debit transactions, in a ruling favoring retailers including convenience-store operators, who say the fees are too high, according to a Reuters report.
Debit swipe fees totaled $38.7 billion in 2024 and total swipe fees have more than doubled over the past decade to a record $187.2 billion, according to a report by the National Retail Federation (NRF).
Merchants claim they are losing revenue when forced to absorb the charges, said Reuters, and banks say the cap doesn’t account for many costs that debit-card issuers incur to enable transactions.
A 2023 proposal by the Federal Reserve to cut the current debit fee cap from 21 cents per transaction to 14.4 cents is pending at the board. The amount of the fee was unregulated until the Federal Reserve in 2011 set the 21-cent cap.
The regulation at the center of the lawsuit requires banks to set swipe fees at a “reasonable and proportional” level.
In Corner Post Inc. v. Board of Governors of the Federal Reserve System, Corner Post alleged the Federal Reserve improperly “set a one-size-fits-all cap when Congress commanded the board to set an issuer-specific and transaction-specific fee standard.”
The Federal Reserve has defended its rule, saying it was adopted in full compliance with congressional requirements of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.
In his decision, U.S. District Judge Daniel Traynor said the Federal Reserve had acted outside the scope of its authority in issuing the swipe-fee measure, known as Regulation II, according to the report.
Traynor said the fee standard improperly included certain cost categories.
This is the second time Traynor has ruled in Corner Post’s case. In 2022, Traynor dismissed the lawsuit, ruling it was filed outside of a six-year statute of limitations governing such cases. The U.S. Supreme Court in a 6-3 ruling last year reinstated the lawsuit.
“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,” NRF Chief Administrative Officer and General Counsel Stephanie Martz said in a statement praising the ruling. “That question is now settled. 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.”
U.S. District Judge Daniel Traynor on Wednesday granted summary judgment in a 2021 federal lawsuit filed by Corner Post, a Watford City, N.D., truck stop and convenience store, NRF said. Traynor vacated the Fed’s cap on debit card swipe fees but said that part of the order would be placed on hold pending any appeal “in order to prevent interchange transactions from becoming a completely unregulated market.” Traynor said his order does not prevent the Fed’s proposed reduction in the cap, which has been pending since 2023, from taking effect if the Fed moves forward with the reduction.
The court ruling will not take immediate effect, giving the Federal Reserve a chance to appeal the ruling, Reuters said. Once the appeals court rules, either side will likely ask the U.S. Supreme Court to take up the case, it added.
Corner Post was joined in the lawsuit by the North Dakota Retail Association and the North Dakota Petroleum Marketers Association.
The U.S. Supreme Court last year allowed the case to move forward despite the Fed’s position that it was blocked by a six-year statute of limitations.
The lawsuit says the Fed set the cap higher than allowed under the Durbin Amendment, a 2010 law directing it to adopt regulations resulting in debit card swipe fees that were “reasonable” and “proportional” to banks’ costs, NRF said. Congress limited costs the Fed could consider to incremental expenses, and the Fed initially proposed a limit of 7-12 cents per transaction. Under pressure from banks, however, it also took fixed costs, fraud losses, transaction monitoring and network processing fees into consideration. The final cap, which applies only to financial institutions with at least $10 billion assets, was set at 21 cents plus 1 cent for fraud prevention and 0.05% for fraud loss recovery.
A Fed survey found banks allowable costs averaged 7.7 cents per transaction as of 2009, meaning the cap was originally less than three times the cost. A survey showed the average had dropped to 3.9 cents by 2021, making the cap over five times banks’ costs, NRF said.
In October 2023, the Fed proposed lowering the cap to 14.4 cents per transaction and reducing the amount for fraud loss to 0.04% but raising the amount for fraud prevention to 1.3 cents.
In 2024, NRF filed comments saying the base rate should be 10.5 cents to keep it at the original proportion, although tiered rates could be set based on banks’ debit card transaction volume. NRF said the 1 cent for fraud prevention should be eliminated since adoption of EMV chip cards in 2015 shifted fraud costs to merchants, and that the percentage for fraud cost should be based on banks’ net costs after considering fraud borne by merchants.
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