A federal judge dealt a blow to the Federal Reserve and debit card issuers by ruling against the central bank in a high-profile lawsuit challenging the central bank's 2011 rule regulating interchange fees.
Judge Daniel Traynor of the U.S. District Court in North Dakota issued a summary judgement on Wednesday evening in favor of Corner Post, Inc., a North Dakota truck stop that sued the Fed in 2021. Backed by national retail organizations, Corner Post successfully argued that the Fed's rule limiting the processing fees that card issuers can charge retailers set that limit too high.
Specifically, Traynor agreed that current calibration of the restriction has not accounted for advancements in payment processing technology and economies of scale, thus allowing issuers to collect higher fees from merchants than what is needed to offset their operating costs.
Because of this, he concluded, the Fed's 2011 rule does not comply with the so-called Durbin Amendment — a provision from the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 that called for limits on debit processing fees. The addendum is named after Sen. Richard Durbin, an Illinois Democrat.
As a result of this week's decision, the Fed's Regulation II has been vacated, though Traynor also issued a stay against the action in case the Fed appeals the ruling. Without the hold, the judge noted in his
The ruling does not impact the Fed's
Banking groups, some of which
In a joint statement issued Thursday, the Bank Policy Institute and The Clearinghouse said they were "severely disappointed" in the court's ruling.
"The payment system is secure, convenient and reliable because of significant investment by banks, and today's decision, if affirmed, would undermine that system," the groups' statement reads. "It would disincentivize innovation and perpetuate a misguided notion that banks should be forced to offer products and services without being able to recover the costs necessary to sustain those investments."
The banking trades said they are weighing their legal options but they plan to "continue to pursue every avenue to ensure that banks can recover their costs and reasonable return, as the Durbin Amendment itself provides."
Rob Nichols, president of the American Bankers Association — which was not a party to the lawsuit — echoed the disappointment from BPI and TCH in a separate statement on Thursday afternoon.
Nichols also said that the Durbin Amendment is structurally flawed, arguing that it calls for mandating that banks provide expensive services at no cost, thus restricting their ability to provide customers with benefits such as rewards programs. This week's ruling, he said, would further limit what banks can offer their customers.
"This ruling only harms consumers even more by prohibiting today's government mandated interchange fees from supporting fraud prevention and enhanced data security," he said. "It allows retailers and merchants to effectively benefit from the superhighway that is America's debit payment system without having to cover any of the costs needed to maintain, protect and upgrade that system."
Nichols said he expects the Fed to appeal the decision.
Merchants and retailers, meanwhile, were elated by the ruling. Doug Kantor, general counsel of the National Association of Convenience stores, said the decision will bring better balance to the payments processing space.
"We are glad to see this well-reasoned decision," Kantor said in a prepared statement. "This case shows that banks have swiped a windfall of billions of dollars per year in debit fees from Main Street that go far beyond normal, competitive profit margins. The Federal Reserve should quickly rewrite its rules to cure this problem and reduce the inflationary pressure these fees impose on the entire US economy."
The Fed's 2023 proposal calls for revising both the base level as well as the transaction-proportionate components of the fee cap. The base would fall from 21 cents per transaction to 14.4 cents, while the so-called ad valorem element would be multiplied by 4 basis points instead of 5 basis points. The fraud-prevention adjustment would go from 1 cent to 1.3 cents. As a result, fees on a $50 transaction would be capped at 17.7 cents instead of 24.5 cents, a decrease of nearly 28%. The proposal also calls for revisiting the cap every two years.
At the time, then-Vice Chair for Supervision Michael Barr said the change was necessary to account for payments innovations that have made debit processing relatively less expensive for issuers.
"The debit card-related costs incurred by large debit card issuers have changed significantly since the interchange fee cap was established," Barr said. "The proposed rule would update the interchange fee cap for the first time since it was adopted to reflect the changes in debit card related costs, so that the cap remains reasonable and proportional to these costs."
Meanwhile, then-Gov. Michelle Bowman — who now holds the title of vice chair for supervision — argued that the proposal amounted to "rough justice" by imposing the same fee cap schedule on all issuers regardless of their size or business model. She voted against the proposal.
"These smaller debit card issuers do not exist in a vacuum," Bowman said. "Issuers of all sizes use the same payment rails, and smaller issuers inevitably face some degree of pricing pressure, at least indirectly, from the interchange fee cap."
The Corner Post lawsuit was one of several pieces of key administrative law litigation to emerge in recent years, along with Loper Bright v. Raimondo — which undid the decades-old precedent known as Chevron Deference — Jarkesy v. SEC and Cantero v. Bank of America.
Even before this week's decision, Corner Post proved to be a precedent-setting case. The Supreme Court ruled that the truck stop could still bring the case against the Fed 10 years after Reg II was adopted even though the statute of limitations expires after six years. The high court determined that because Corner Post began operations less than six years prior, it was still eligible to sue. The high court then remanded the case to the lower court.
The evolving landscape around administrative law has given some Fed officials pause about advancing changes to its interchange policies. Last year, Fed Gov. Christopher Waller — who leads the board's payments group — said the central bank would be wise to let all these matters play out in court before finalizing any new changes.
"The legal uncertainty around things now, with Chevron, Corner Post, all the legal cases, for me … I'd like a little more clarity on how the courts are going to be interpreting things, like how we interpret Reg II, before we put up a big new proposal or new stage," Waller said during an event
