Merchants win latest skirmish over debit interchange

The Federal Reserve Board may need to start from scratch its work capping debit card interchange if a decision handed down by a federal court judge on Aug. 6, 2025, is upheld on appeal. Justice Daniel M. Trayner of U.S. District Court for the District of North Dakota stayed his summary judgement until the Fed has an opportunity to appeal the decision to the U.S. Circuit Court for the Eighth Circuit in St. Louis.

He added that his written decision does not prevent the Fed from moving forward with a proposal to lower the debit interchange cap to 14.4 cents plus 4 basis points (0.04 percent) of the transaction amount plus 1.3 cents to cover fraud prevention costs. That proposal has been pending for about two years.

A lesson in grammar

In a detailed, 44-page decision, Justice Trayner ruled that the Fed misread instructions contained in the Durbin Amendment to the Dodd-Frank Act when, under a new rule set dubbed Regulation II, it set the debit card interchange cap at 21 cents plus 5 basis points (0.5 percent) and an extra penny for meeting certain fraud prevention criteria. The cap should have been set much lower, the judge ruled, siding with Corner Post, a truck stop and convenience store that sued the Fed over the cap not long after it opened for business in Watford City, North Dakota, in 2018.

Reg II was adopted in 2011, and typically the statute of limitations for suing a federal agency over a regulation is six years. Corner Post was allowed to sue the Fed because it secured a ruling by the U.S. Supreme Court that the clock on the statute of limitations didn't start ticking until Corner Post was first "injured" by Reg II.

The judge's ruling at times read like a commentary on the English language. "When one wonders if studying grammar and English's oddities is worthwhile, this case answers with a resound 'yes'," he wrote. He complained that "Congress inconsistently used 'which,' 'that,' and commas throughout the Durbin Amendment."

The judge continued: "Grammatically-conscious writers typically begin a descriptive clause with the word 'which' and set it apart with commas…. Restrictive clauses, on the other hand, start with that and are not sandwiched by commas."

Fed faulted on several counts

English lessons aside, the judge faulted the Fed on several other counts. For example, while Congress gives agencies "discretionary authority" for carrying out laws, they do not enjoy carte blanche authority. The "reviewing court" determines what delegation exists and the boundaries of that delegation, the judge explained.

"This is not to say the [Fed] Board has zero discretion in regulating interchange fees, but Congress certainly did not hand the Board a blank check of discretion that it claims to have," he wrote.

The judge also wrote that the Fed "improperly interpreted" the Durbin amendment instruction for setting the debit card cap by adding prohibited costs, such as network fees, transaction monitoring costs and fraud losses when determining the base fee. The only costs that should be included, according to the Durbin Amendment, are transaction authorization, clearing and settlement, he added.

"The debated cost clause has the unorthodox mixture of starting with 'which' (a 'descriptive' feature), but lacks commas on either side (a 'restrictive' feature)," the judge's opinion states. "Congress drafted a few grammatically proper descriptive clauses," he continued, "but counterexamples undercut any alleged grammatical consistency of 'which' versus 'that' in the Durbin Amendment."

Reining in fees

"The Durbin Amendment was enacted to rein-in big banks' ballooning interchange fees, so Congress was naturally cautious in detailing what 'shall' and shall not' be included when regulating said fees," the judge wrote." Congress did not hide an 'easter egg' of a third cost category in the Durbin Amendment, particularly when those additional costs would benefit banks at the expense of merchants and consumers."

Not surprisingly, merchant groups cheered the judge's ruling. "We are glad to see this well-reasoned decision," said Doug Kantor, general counsel at the National Association of Convenience Stores and a member of the Merchants Payments Coalition executive committee.

"If the Durbin Amendment is to mean anything, it's that there are specific costs that banks can recover from merchants, and costs they categorically cannot recover from merchants," said Stephanie Martz, CEO and general counsel at the National Retail Federation.

Groups representing financial institutions expressed disappointment. "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 Clearing House and the Bank Policy Institute wrote in a joint statement.

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