Court says the Fed's 21-cent debit card fee cap was set too high

A federal appeals court says the Federal Reserve set its 21-cent cap on debit card fees too high. The Eighth U.S. Circuit Court of Appeals upheld an earlier ruling that the Fed counted costs the law did not allow. The cap has shaped how banks and stores split debit card costs for more than a decade.

What the court found

The rule comes from the Durbin Amendment. It says the fee stores pay on debit card purchases, called an interchange fee, must be "reasonable and proportional" to banks' costs. The law told the Fed to look at banks' incremental costs, meaning the extra costs of handling each transaction.

The court said the Fed went further. It also let banks count fraud losses, transaction monitoring and network processing fees. The Fed's process took nearly a year of research, analysis and public input. The court now wants "a fee structure that reflects the statute Congress wrote."

Who it affects

The cap applies to banks with more than $10 billion in assets. Those banks are limited to recouping their operating costs. Smaller banks are exempt. Stores that pay the fees could save money if the cap drops. Banks could look for other ways to make up the lost income.

• Stores: may pay less per debit sale if the cap is lowered.
• Large banks: may collect less on each debit transaction.
• Small banks: exempt from the cap today.

A twist in the numbers

The lawsuit was filed in 2021 by Corner Post, a North Dakota truck stop and convenience store. Yet about 75% of the debit cards it accepts are not covered by the cap. Smaller banks tend to serve rural areas, while larger regulated banks are more common in big cities.

For those exempt cards, Visa sets the fee at 15 cents plus 0.80% of the purchase. Don Apgar of Javelin Strategy & Research says the break-even point is about $8. The regulated fee is cheaper for a store on every sale except those under $8.

What happens next

The Fed has not said what it will do. It could appeal the decision or restart its review of banks' costs. Corner Post suggested a tiered system based on a bank's asset size, transaction volume and geography. The material does not say what a new cap would be, or when one could take effect.