Key Points

  • The Eighth Circuit affirmed the district court's judgment vacating Regulation II's 21-cent per-transaction cap on debit card interchange fees and remanded to the Federal Reserve.
  • The court held that "incremental cost" in 15 U.S.C. § 1693o-2(a)(4)(B)(i) means marginal cost, the cost of one additional debit transaction, and that the statute bars the Fed from considering fixed costs not specific to a particular transaction.
  • The court gave the Fed's interpretation no deference, citing Loper Bright and the Durbin Amendment's own provision, 15 U.S.C. § 1693b(e), and also declined Skidmore deference.
  • The opinion said the statute calls for "standards," plural, rather than a single uniform cap, though the Fed may use a proxy such as average variable cost if it bears a reasonable relationship to marginal cost.
  • The decision takes effect when the mandate issues, seven days after the 45-day rehearing deadline for agency cases or an order denying rehearing.

A federal appeals court on Monday upheld a ruling that threw out the Federal Reserve's 21-cent cap on debit card swipe fees, holding that the Fed counted bank costs that Congress had barred it from considering when it set the limit.

A three-judge panel of the U.S. Court of Appeals for the Eighth Circuit ruled for Corner Post, Inc., a truck stop and convenience store in North Dakota. Corner Post sued the Fed under the Administrative Procedure Act. Judge Stras wrote the opinion for a panel that included Judges L.R. Smith and Benton.

The decision sends the Fed back to rebuild the rule, known as Regulation II, that it issued in 2011. The panel held that the Durbin Amendment, the provision of the Dodd-Frank Wall Street Reform and Consumer Protection Act that governs the fees, lets the Fed consider only marginal cost, the added expense of processing one more transaction. Fixed costs, which stay the same however many transactions a bank handles, are excluded. The court remanded for the agency to devise "a fee structure that reflects the statute Congress wrote."

Consumers used debit cards more than 100 billion times in 2023, in transactions totaling $4.7 trillion, according to the opinion. Each swipe triggers an interchange fee, a payment the merchant's bank sends the cardholder's bank to compensate it for authorizing, clearing and settling the purchase.

The Durbin Amendment directs the Fed to keep those fees "reasonable and proportional to the cost incurred by the issuer with respect to the transaction." The statute splits costs into two groups. The "incremental cost" of "a particular electronic debit transaction" shall be considered. Other costs "which are not specific to a particular electronic debit transaction" shall not be.

Regulation II capped the fee at 21 cents per transaction plus 0.05% of the transaction's value to cover fraud losses. Banks that followed fraud-prevention standards could charge a penny more. Judge Stras wrote that the Fed included fixed costs by treating the statute as ambiguous, citing Chevron, the 1984 Supreme Court decision that barred courts from substituting their own reading of a statute for an agency's reasonable one. The Supreme Court overruled Chevron in 2024 in Loper Bright Enterprises v. Raimondo. Of "incremental cost," Judge Stras wrote, "The Federal Reserve never decided what it is, opting instead for a 21-cent per-transaction cap."

Corner Post's suit first reached the Supreme Court on a statute-of-limitations question. In 2024 the justices held that the challenge had come in time. On remand, the U.S. District Court for the District of North Dakota ruled on summary judgment that the Fed had counted four kinds of costs that are not specific to a particular transaction: fixed costs of authorization, clearance and settlement; network processing fees; transaction-monitoring costs for fraud prevention; and fraud losses. The district judge, Daniel Mack Traynor, now an Eighth Circuit judge, vacated the cap but stayed the ruling pending appeal.

The Fed asked the appeals court to defer to its reading of the statute. The panel declined. Judge Stras wrote that deference to agency interpretations ended with Loper Bright, and the opinion noted that the Durbin Amendment itself does not "alter[], limit[], or otherwise affect[]" the deference courts give the Fed. "Zero deference from the Administrative Procedure Act, plus zero deference under the statute we are interpreting, still adds up to nothing," Judge Stras wrote. The court also declined to give the rule weight under Skidmore v. Swift & Co., a 1944 Supreme Court decision.

To define "incremental cost," the panel turned to economics textbooks and dictionaries. Quoting a leading textbook, the opinion said that "[m]arginal cost tells us the increase in total cost that arises from producing an additional unit of output." The statute's reference to "a particular electronic debit transaction" confirms that the relevant cost is that of one transaction, the court reasoned, and the costs the statute excludes are fixed costs.

The panel acknowledged that a cost can be fixed for one bank and incremental for another. A bank that buys fraud-detection software for a one-time fee bears a fixed cost, while a bank that outsources the work and pays per transaction does not. The panel cited a 2014 D.C. Circuit decision, NACS v. Board of Governors, that described the same argument. "One can reasonably question whether the statute should treat these two scenarios differently, but not whether it does," Judge Stras wrote. "No matter how much some banks and payment networks disagree with approaching the problem this way, the Federal Reserve does not get to revise Congress’s work."

The court also faulted the uniform design of the cap. "The Federal Reserve is supposed to set 'standards,' plural, not a single uniform cap like the one it imposed here," the opinion said. The panel added that fees need not exactly match marginal cost and that the Fed may use a proxy, perhaps average variable cost, if it bears a reasonable relationship to banks' marginal costs. "At a minimum, however, it must sort the costs into those that are transaction-specific and those that are not," Judge Stras wrote. "Not just pick a number and hope it is close enough for government work."

Dozens of groups filed friend-of-the-court briefs. The American Bankers Association and other banking groups supported the Fed. Retail groups, including the National Association of Convenience Stores, supported Corner Post, as did Senator Richard J. Durbin.

The Fed proposed a lower cap of 14.4 cents per transaction in November 2023 but has not adopted it, and the panel said that pending rulemaking did not affect its review. Having set the rule aside, the court did not reach Corner Post's other arguments.

The ruling takes effect only when the Eighth Circuit issues its mandate. Under the federal appellate rules cited in the opinion, the parties have 45 days to seek rehearing in a case involving a federal agency, and the mandate issues seven days after that deadline passes or after an order denying rehearing.