Retailers welcome court’s decision to overturn rule putting a cap on swipe fees

A federal appeals court has overturned Regulation II, a Federal Reserve rule capping the amount banks can charge merchants for processing debit card transactions. While this kind of “swipe fee” rule could theoretically benefit retailers, the ruling actually favors merchants, who argued the rule was setting rates too high.

The regulation originated with the Durbin Amendment to the Dodd-Frank Act of 2010, which mandated that interchange fees “be reasonable and proportional to the cost incurred by the issuer” with respect to the transaction. At issue in the lawsuit was the formula the Fed came up with to meet this standard.

According to the plaintiff, a North Dakota convenience store and truck stop called Corner Post, the Fed created a “one-size-fits-all” standard rather than one tailored to specific issuers and transactions.

Per the lawsuit, “the complaint challenged Regulation II on the ground that it allows higher interchange fees than the statute permits.”

The National Retail Federation, which welcomed the decision, explained it this way: While the Fed initially proposed setting the fee between 7 cents and12 cents based on the incremental cost of each transaction, it later incorporated fixed costs, fraud losses, transaction monitoring, and networking processing fees, raising the rate to more than 21 cents.

The lobbying group added that in the years since the creation of the rule, the Fed has periodically reviewed banks’ transaction costs, but has not lowered the cap in proportion to falling costs, citing a survey that average costs had dropped to 3.9 cents by 2021.

Banking advocates such as the Bank Policy Institute and The Clearing House Association contest this framing, arguing in a “friend of the court” brief that overturning Regulation II would threaten “their members’ ability to recover a reasonable return on—indeed even the full costs of—enabling debit card transactions, as required by the Durbin Amendment.”