- Key insights: Linney's Pizza v. the Board of Governors of the Federal Reserve, a second lawsuit challenging the Federal Reserve's debit interchange fee regime, is set to be heard in the U.S. Court of Appeals for the 6th Circuit in October.
- What's at stake: The 6th Circuit is the second appeals court to take up a case involving merchants' challenge to the Federal Reserve's implementation of the Durbin Amendment. Analysts believe that the two cases will reach the U.S. Supreme Court.
- Forward look: JPMorganChase, Bank of America and Wells Fargo — as the largest debit issuers by purchase volume — are most at risk to see a dramatic cut in interchange revenue.
A second lawsuit challenging the Federal Reserve's debit interchange cap is slated to begin oral arguments in the U.S. Court of Appeals for the 6th Circuit on Oct. 22 in a case that could dramatically cut debit interchange revenue for the largest debit card issuers, including JPMorganChase, Bank of America and Wells Fargo.
The case, Linney's Pizza v. the Board of Governors of the Federal Reserve, questions whether the Federal Reserve included ineligible expenses in its calculation of issuer costs. Judge Gregory F. Van Tatenhove in Kentucky upheld the Federal Reserve's debit interchange fee cap. The merchants are appealing.
"The Kentucky decision is important because a
That will likely send the issue to the U.S. Supreme Court by late 2027, with a ruling in 2028, according to Seiberg.
"We continue to expect the merchants to win these court challenges given how Congress phrased the Durbin amendment," Seiberg said. "It is why we have given more weight to the judge's decision in North Dakota invalidating the rate regime than we have to the judge's decision in Kentucky upholding the pricing."
If merchants win, debit interchange could be cut substantially. TD Cowen estimates that debit interchange fees could fall to a fee as low as 5 cents per transaction, down from 21 cents plus 5 basis points per transaction. Any new cap may be tailored to individual issuers rather than the single debit card interchange cap that has been in place since 2011.
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The cases are a "huge looming threat to large retail banks," according to Eric Grover, principal at Intrepid Ventures, especially in a
"The Supreme Court is unlikely to hold it was the Fed's prerogative to expansively interpret the law so as to make it less harmful. The Fed is supposed to be an instrument of the law, not law unto itself," Grover told American Banker.
"The statute says that debit interchange is supposed to be reasonable and proportional to issuers' incremental processing costs," Grover said. "Bank of America's, Chase's, and Wells Fargo's incremental debit processing costs are close to zero. The largest issuers' debit economics would be devastated if Corner Post is upheld."
Big banks and the payments industry have been "recklessly complacent," Grover said. "They decided to live with the Fed's charitable implementation of the Durbin Amendment rather than making a full-throated affirmative case in the political and public arena for its repeal. The political climate matters."
Capital One's three-party Discover Cards, PayPal's Venmo debit card, and Block's Cash App card, which are issued by banks with under $10 billion in assets, already have a competitive advantage over debit cards subject to Durbin's interchange cap, Grover said.
"That advantage will be greatly amplified. Operating a three-party debit network or partnering with exempt issuers under the $10 billion asset threshold will become much more attractive," Grover said. "In fact, I would argue it will become critical for anyone wanting to maintain an economically viable retail debit product."
