Background
The Durbin Amendment directs the Federal Reserve to establish standards ensuring that debit-card interchange fees are reasonable and proportional to an issuer’s transaction costs. In doing so, the agency must consider the incremental cost of authorizing, clearing, or settling a particular transaction, while excluding other costs that are not specific to a particular transaction.
The Federal Reserve’s Regulation II established a base cap of 21 cents per transaction, plus an amount tied to the transaction’s value for fraud losses and a possible fraud-prevention adjustment. Corner Post, a North Dakota truck stop and convenience store, challenged the regulation under the Administrative Procedure Act. After the Supreme Court held that Corner Post’s challenge was timely, the district court granted summary judgment to Corner Post, vacated the cap, and stayed its decision pending appeal.
The Court’s Holding
The Eighth Circuit affirmed. Exercising independent judgment under Loper Bright, the court interpreted “incremental cost” as the marginal cost added by processing one additional debit-card transaction. It held that the statute requires the Federal Reserve to distinguish transaction-specific costs from fixed costs that do not vary with the number of transactions.
The court concluded that Regulation II violated the statute because the Federal Reserve incorporated fixed costs—including some hardware, software, labor, network-connectivity, fraud-monitoring, and fraud-loss expenses—without determining whether they were specific to particular transactions. Although the agency may use a proxy such as average variable cost if it bears a reasonable relationship to marginal cost, it cannot impose a uniform figure without first separating transaction-specific costs from costs the statute excludes. The court affirmed vacatur of the current 21-cent cap and remanded for the Federal Reserve to develop a lawful fee structure.
Key Takeaways
- “Incremental cost” means the marginal cost attributable to processing one additional debit-card transaction.
- The Federal Reserve must exclude fixed costs that are not specific to a particular transaction, even if the same category of expense is transaction-specific for another bank.
- The agency may use a reasonable proxy rather than calculate each transaction’s exact marginal cost, but its methodology must maintain the statutory distinction between transaction-specific and non-transaction-specific costs.
Why It Matters
The decision invalidates the core 21-cent component of the federal debit-card interchange-fee framework and requires the Federal Reserve to devise a replacement grounded in transaction-specific marginal costs. The ruling does not become effective until the Eighth Circuit issues its mandate.
The opinion also illustrates the practical impact of post-Loper Bright judicial review: an agency’s statutory interpretation receives no controlling deference, even when Congress expressly authorized the agency to issue regulations and establish standards.