The court’s rejection of the Fed’s fee formula could force a nationwide reset of how banks, merchants, and networks share the cost of debit card transactions.
A long-running challenge to the Federal Reserve’s debit card interchange fee rules has ended in a major win for merchants, after a US District Court in North Dakota found the central bank exceeded its legal authority under the Durbin Amendment.
In a 44-page order dated August 6, Judge Daniel M. Traynor granted Corner Post, Inc. – a North Dakota truck stop and convenience store – summary judgment, while denying the Fed’s cross-motion.
The ruling in Corner Post, Inc. v. Board of Governors of the Federal Reserve System concludes that Regulation II, adopted in 2011, unlawfully broadened the categories of costs that banks could recover through debit card interchange fees.
The case targeted the interchange cap, set by the Fed at 21 cents plus 0.05% of the transaction amount, with an additional fraud prevention adjustment, which applies to banks with $10 billion or more in assets.
A dispute over the Durbin Amendment’s boundaries
The Durbin Amendment to the 2010 Dodd–Frank Act requires interchange fees to be “reasonable and proportional to the cost incurred by the issuer with respect to the transaction.”
According to Judge Traynor, Congress went further by mandating that only incremental costs directly related to authorisation, clearance, and settlement (ACS) of a transaction could be considered, and that all other costs “shall not” be included.
Corner Post argued that the Fed’s rule unlawfully introduced a “third category” of recoverable costs, including fixed ACS expenses, network processing fees, transaction-monitoring costs, and fraud losses. The court agreed, holding that the statute creates a “bifurcated cost system” and leaves no room for additional categories.
The ruling also rejected the Fed’s request for broad discretion, noting that following the Supreme Court’s 2024 decision in Loper Bright Enterprises v. Raimondo, courts must interpret statutes independently rather than deferring to agency interpretations.
From procedural fight to substantive victory
Corner Post first filed suit in April 2021, joined initially by two North Dakota trade associations. The Fed sought dismissal, arguing the six-year statute of limitations had run, as Regulation II was finalised in 2011.
That defence collapsed in July 2024 when the Supreme Court ruled the clock starts when a plaintiff is first injured, not when the rule is issued.
With the case revived, Corner Post pursued its Administrative Procedure Act claims. Judge Traynor’s order not only sides with the merchant on statutory interpretation but also addresses claims that the rule was “arbitrary and capricious” in failing to link the cap to actual issuer costs, which the court noted averaged around eight cents per transaction.
Why it matters for the payments industry
The decision could trigger the most significant change to debit card economics in more than a decade. By narrowing the allowable costs in interchange fee calculations, it threatens a revenue stream worth billions to large issuers and the card networks that set fee schedules.
It is also one of the first major tests of a financial regulator’s authority in the post-Chevron environment, where agencies no longer enjoy automatic judicial deference.
For merchants, it offers a potential route to lower acceptance costs; for banks, it raises concerns about offsetting lost income, possibly through higher account fees or reduced card rewards.
The Fed was already considering lowering the cap under a 2023 proposal that cited falling issuer costs. Judge Traynor’s ruling accelerates the timeline, ordering a six-month stay of the vacatur to allow the Board to draft a compliant standard, though an appeal could delay implementation.
Parallel litigation is also in play: Linney’s Pizza, LLC v. Board of Governors of the Federal Reserve System in the Eastern District of Kentucky challenges Regulation II on similar grounds, suggesting the fight over debit interchange is far from over.
