On October 26, the U.S. Court of Appeals for the Eighth Circuit affirmed a federal district court’s judgment vacating the Federal Reserve Board’s 21-cent cap on debit-card interchange fees. The court held that the Board exceeded its authority under the Durbin Amendment when it included costs that were not specific to individual debit-card transactions.
The Durbin Amendment directs the Board to consider the incremental costs of authorizing, clearing, and settling a particular transaction when setting interchange-fee standards. The court interpreted “incremental cost” as the added cost of processing one additional transaction. It concluded the Board’s cap improperly included fixed costs, such as certain software, hardware, labor, and network expenses, that may not rise with each transaction. The court also found that a single uniform cap did not account for differences among issuers’ transaction-specific costs.
The court affirmed the lower court’s vacatur of the current cap and remanded the matter for the Board to develop a fee structure consistent with the statute. It noted that the Board could use a proxy, such as average variable cost, if it reasonably reflects the incremental costs issuers incur. The court’s opinion states that its decision takes effect when the appellate mandate issues, after the deadline to seek rehearing or an order denying rehearing.
Putting It Into Practice: For now, the existing debit-card interchange fee cap remains in effect. The Eighth Circuit’s decision takes effect when its mandate issues, at which point the district court’s vacatur will take effect and the Federal Reserve Board must develop a new fee structure. That leaves issuers and merchants waiting to see how the Board will measure transaction-specific costs and what limits will apply. Issuers, payment networks, processors, and merchants should monitor the mandate and the Board’s next steps as changes to the cap could affect debit-card fee arrangements.