Appeals Court Overturns Merchant Challenge to Fed’s Interchange Cap Rule

The Federal Reserve’s cap on debit card “swipe fees” is not too high, a U.S. Court of Appeals ruled today, reversing a lower-court ruling that supported merchants’ arguments in an ongoing debate over the fees financial institutions charge for accepting card-based transactions.

In the case, known as NACS, et al. v. Board of Governors of the Federal Reserve System, a merchants’ coalition challenged the Fed’s implementation of a Dodd-Frank Act-imposed debit interchange cap as too high. Financial institutions maintain that the cap is, in fact, too restrictive.

“The district court granted summary judgment to the merchants, concluding that the rules violate the statute’s plain language. We disagree,” the three-member panel of judges ruled Friday. “Applying traditional tools of statutory interpretation, we hold that the (Federal Reserve) Board’s rules generally rest on reasonable constructions of the statute.”

The  so-called “Durbin Amendment” to the 2010 Dodd-Frank Act required the Federal Reserve to limit fees so that they are “reasonable and proportional” to the cost of processing a debit card transaction. The Fed originally proposed a cap of 12 cents per transaction, but ultimately hiked it to roughly 21 cents when finalizing the rule.

The increase was a victory for financial institutions, but still far below the industry average of 44 cents per transaction that existed before the cap was implemented. The interchange rule applies to financial institutions with assets greater than $10 billion, although some smaller financial institutions can be impacted because of a ripple effect in the marketplace.

Much of the court’s attention focused on the challenge to the 21-cent cap on interchange fees, which remains intact for now. “However, we take particular satisfaction with today’s ruling against the district court’s 2013 opinion that credit unions would have to establish multiple relationships for both PIN and Signature debit networks,” says Stan Hollen, president and CEO of CO-OP Financial Services. “This would have impacted all of our clients, adding costs and potentially reducing interchange revenue. Today’s ruling on this matter is truly a significant victory for the credit union movement.”

In the July 2013 district court ruling, Judge Richard Leon said the Fed “clearly disregarded” Congress’ intent in writing the law, and he ordered officials back to the drawing board to set lower limits on how much financial institutions could charge. In a follow-up hearing, he even raised the possibility that banks and credit unions might have to “disgorge” revenue earned through the fees.

“This decision constitutes an almost total rejection of the merchants’ arguments,” CUNA General Counsel Eric Richard said Friday. “We hope this will be a first step toward restoring some grounding in reality to the debate over interchange fees, not only in the courts, but also in Congress and at the regulatory agencies.”

Questions about this story? Contact Gary M. Stein: 503.350.2216,

Posted in CUNA, Federal.