- Key insights:The 8th Circuit U.S. Court of Appeals is set to decide whether a lower court's decision that found the Federal Reserve mispriced debit interchange limits in the Durbin Act stands.
- What's at stake: If the appeals court holds up the lower courts ruling, debit interchange fees could fall to a fee as low as 5 cents per transaction and cause banks to push faster payment options, according to TD Cowen.
- Forward look: TD Cowen analysts expect the case to go all the way to the U.S. Supreme Court if the appellate court uphold the lower court's ruling and rule in favor of merchants.
Merchants likely have an upper hand in a lawsuit being argued in the U.S. Court of Appeals for the 8th Circuit. It's a case that is poised to reshape debit card interchange fees and could go all the way to the U.S. Supreme Court — and push banks to consider other payment options.
"We still give the edge to the merchants in litigation that the 8th Circuit could decide this fall on whether the Federal Reserve set the debit interchange fee too high," TD Cowen analyst Jaret Seiberg said in a research note. "This is the precursor to an expected Supreme Court fight. Litigation will take time, but we view the risk to debit interchange as serious enough to warrant flagging the issue now. A Fed loss could benefit alternative networks."
What's the dispute?
Congress in the Dodd-Frank Act required the Federal Reserve to set debit interchange fees for banks with at least $10 billion in assets. Those fees covered incremental costs incurred by the issuer related to authorization, clearing and settlement of a debit transaction. The question before the court is whether the Fed's definition was too broad in including other incremental costs such as fraud monitoring and prevention and the fees charged by payments networks such as Visa and Mastercard.
The case centers around
It's a case that magnifies regulatory uncertainty after the U.S. Supreme Court's
What if the merchants win?
The 8th Circuit — which hears cases from District Courts in Arkansas, Iowa, Minnesota, Missouri, Nebraska, and North and South Dakota — heard oral arguments in May, and usually decides a case within four months on average, suggesting there could be a decision as early as September.
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If merchants prevail, debit interchange fees could drop from 21 cents plus 5 basis points per transaction to a fee as low as 5 cents per transaction, TD Cowen said. Fees would vary by bank.
A reduction that dramatic would negatively impact the economics of debit cards for issuers, creating demand for other methods.
"Debit fees that low could boost alternative payment options like stablecoins and instant payments," Seiberg said.
Seiberg expects the case to go all the way to the Supreme Court as early as 2028 because another similar case in Kentucky upheld the debit interchange fee regime. Merchants have appealed that decision, and it is set to be heard in the U.S. Court of Appeals for the 6th Circuit.
"Our expectation is that the Supreme Court will accept the appeal if the merchants win as there would be a conflict between the 8th Circuit and the D.C. Circuit," Seiberg said.
