On August 6, the U.S. District Court for the District of North Dakota vacated the Federal Reserve's 2011 Regulation II interchange fee cap rule, finding that the rule allegedly exceeded the FRB's authority under the Durbin Amendment of the Dodd-Frank Act. The court determined that the Board improperly included costs unrelated to specific transactions in calculating the interchange fee cap.
The challenge, filed in 2021, alleged that the FRB violated the Administrative Procedure Act by adopting caps that incorporated costs Congress did not authorize. The Durbin Amendment of the Electronic Fund Transfer Act states that the interchange fees charged by a consumer's bank to a merchant's bank in a debit card transaction must be "reasonable and proportional to the cost incurred by the [consumer's bank] with respect to the transaction." According to plaintiffs, the FRB's regulation, which sets a 21-cent maximum allowable per-transaction fee, provides a windfall for issuers given that issuers had seen costs that were less than a quarter of the regulation's maximum fee of 21 cents.
In its reasoning, the court emphasized that the statute distinguishes between transaction-specific incremental costs and broader operational expenses, and that the latter must be excluded from the interchange fee calculation. The court found that the FRB's framework allowed issuers to recover more than "reasonable and proportional" expenses, disadvantaging merchants and undermining the statutory design. While acknowledging the difficulty of crafting a more particularized methodology, the court held that the Electronic Fund Transfer Act nonetheless demands such an approach.
The ruling invalidates the framework the FRB adopted in 2011 after extensive industry feedback to implement the Durbin Amendment. The court stayed its decision pending an appeal to the Eighth Circuit.
Putting It Into Practice: The existing cap remains in place while appellate proceedings move forward. While this means no immediate operational changes are necessary, issuers, networks, and merchants should closely follow both the appellate process and the FRB's next steps. We will continue to track these developments.
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