A federal appeals court on Oct. 26 affirmed a decision vacating the Federal Reserve’s 21-cent cap on debit card interchange fees, ruling that the Fed counted costs Congress told it to leave out. The court sent the rule back to the Fed to develop a fee structure that matches the statute.

The three-judge panel of the US Court of Appeals for the Eighth Circuit, made up of Circuit Judges Lavenski R. Smith, Duane Benton and David R. Stras, ruled in Corner Post, Inc. v. Board of Governors of the Federal Reserve System, No. 25-3000, according to the court record on GovInfo. Judge Stras wrote the opinion. The plaintiff, Corner Post, is a truck stop and convenience store in North Dakota that sued the Fed under the Administrative Procedure Act (APA). An earlier fight over whether its challenge came too late reached the Supreme Court, which held in 2024 that the suit was timely.

The rule at issue is Regulation II, which the Fed issued under the Durbin Amendment to the Dodd-Frank Act. As the opinion describes it, Regulation II caps debit interchange at 21 cents per transaction plus 0.05% of the transaction’s value to cover fraud losses, and issuers that follow fraud-prevention standards can charge one cent more. The Durbin Amendment requires fees to be “reasonable and proportional to the cost incurred by the issuer with respect to the transaction.” It directs the Fed to consider the “incremental cost” of a particular transaction and not to consider other costs that are not specific to a particular transaction.

The district court in North Dakota had found on summary judgment that the Fed included costs that are not transaction-specific: fixed costs tied to authorization, clearance and settlement; network processing fees; transaction-monitoring costs for fraud prevention; and fraud losses. It ordered the rule vacated but stayed that order pending the appeal.

The appeals court agreed. It held that “incremental cost” means marginal cost, the amount one additional debit transaction adds to the issuing bank’s total cost, and that the statute bars the Fed from considering fixed costs. The court declined to defer to the Fed’s reading of the law, citing the Supreme Court’s 2024 Loper Bright decision. It added that fees do not have to match marginal cost exactly and that the Fed may use a proxy, perhaps average variable cost, if it bears a reasonable relationship to issuers’ 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.

In a footnote, the court noted that the Fed proposed in November 2023, but has not adopted, an updated cap of 14.4 cents per transaction plus 0.04% of the transaction’s value, with a possible 1.3-cent fraud-prevention adjustment.

The Retail Litigation Center, which filed an amicus brief supporting Corner Post, welcomed the decision. Monica Welt, the center’s president, called it “a significant victory for every retailer and consumer forced to pay inflated debit-card fees.”

Six banking and payments groups, including the American Bankers Association, America’s Credit Unions and the Electronic Payments Coalition, issued a joint statement. “We are deeply disappointed that the Eighth Circuit affirmed the district court’s decision in the Corner Post case,” they said, arguing the ruling could keep regulated interchange fees from covering banks’ costs to process transactions, prevent fraud and protect customer data.

Why it matters

As the opinion describes it, interchange is paid by the merchant’s bank to the cardholder’s bank on each debit transaction, and Regulation II sets the ceiling for the large banks it covers. The opinion notes that American consumers used debit cards more than 100 billion times in 2023, in transactions totaling $4.7 trillion. The court also observed that the statute calls for “standards,” plural, rather than a single uniform cap, which leaves open how a replacement rule might be structured.

The decision does not change fees immediately. The court said its ruling becomes effective only when it issues its mandate, which happens seven days after the deadline for a rehearing petition, or after an order denying one. In cases involving federal agencies, parties have 45 days to seek rehearing. The Retail Litigation Center also noted that the ruling is not yet effective and may be subject to further review.

What to watch

The next steps are whether the Fed seeks rehearing within the 45-day window and how it responds on remand. A related challenge, Linney’s Pizza, LLC v. Board of Governors of the Federal Reserve System, is pending before the Sixth Circuit; the banking groups noted that the lower court in that case upheld the Fed’s rule.

The caveats

This story describes a court ruling and the parties’ public statements. It is not legal advice, and merchants should consult the opinion and official Fed notices for how any change to Regulation II would apply to them.