U.S. Appeals Court Upholds Reversal of 21-Cent Debit Fee Cap, Sends Rule Back to Fed
Key Facts
On October 26, 2026, the U.S. Court of Appeals for the Eighth Circuit upheld a ruling that struck down the Federal Reserve’s cap on interchange fees for debit card transactions and sent the case back to the agency to develop a legally compliant structure. The dispute concerns a rule governing the fees card-issuing banks receive from merchants when debit transactions are processed. The court said it “affirms the decision striking down the 21-cent cap set by the Federal Reserve,” referring to the lower court ruling that invalidated the cap. The appeals court decision sets no new fee and offers no estimate of the revenue banks might generate in the future. Its effect is also delayed until the court issues its mandate, making a rewrite of the rule a step that follows the ruling itself.
The court relied on its interpretation of the Durbin Amendment, which ties fees to the incremental cost of processing one additional electronic debit transaction. It defined “incremental cost” as the amount one transaction adds to the issuing bank’s total cost. On that basis, it ruled that costs not specific to an individual transaction should be excluded from the calculation. The court said the Federal Reserve could use an alternative measure, such as average variable cost, if it is reasonably related to marginal cost. But it required the agency to distinguish between costs directly associated with a transaction and other costs when preparing a new methodology. This interpretation leaves the Fed room to choose a calculation method while setting limits on what can be included in its estimate of transaction costs.
The existing formula in Regulation II caps the fee at $0.21, plus 0.05% of the transaction value. It also allows an adjustment of $0.01 for eligible issuers to cover fraud-prevention costs. This differs from reducing the rule to a flat fee of 21 cents, because the final amount includes a component tied to the transaction value and may also include the fraud-prevention adjustment. In October 2023, the Federal Reserve proposed lowering the base component to 14.4 cents, with a value component of 4.0 basis points and a fraud-prevention adjustment of 1.3 cents. The initial proposal would have applied to transactions through June 30, 2025. The appeals court ruling now brings the legal basis and calculation method back into focus, without approving those proposed figures as fees in force.
The rule matters in a widely used market: U.S. consumers made more than 100 billion debit card transactions in 2023, with a total value of $4.7 trillion. In 2024, transactions subject to the standards accounted for 60.7% of all debit transactions, and their average interchange fee was $0.23 on an average transaction value of $48.95. Regulation II dates to 2011, when the Federal Reserve adopted it under the Dodd-Frank Act; its interchange-fee provision took effect on October 1 of that year. The original rule exempted issuers with less than $10 billion in assets, including affiliates, from the fee standards. This regulatory framework provides part of the backdrop to the dispute over how transaction costs are measured and which issuers are covered by the restrictions.
A coalition of six trade associations, including the American Bankers Association, said the decision “threatens to compound the harm by preventing regulated interchange fees from reflecting the real costs banks incur to process transactions, prevent fraud and protect customer data.” Association representatives described the ruling as disappointing, linking their position to the costs they say banks bear in operating debit services. Their objection runs counter to the court’s interpretation, which limits the calculation to incremental costs associated with a transaction and excludes expenses that are not specific to it. The ruling is scheduled to take effect after the court issues its mandate, which comes 7 days after the deadline to request rehearing expires or after an order denying the request. In a separate court proceeding, the U.S. Court of Appeals for the Sixth Circuit heard arguments on October 22 in the Fed-related “Lenny Pizza” case, while the Eighth Circuit issued its ruling after oral arguments on May 13, 2026.
U.S. economic data released on October 27 showed the Conference Board’s consumer confidence index rising to 91.7 in October from 84.2 in September, an increase of 7.5 points. The present situation index rose 8.6 points to 120.4, while the expectations index gained 6.9 points to 72.6. In a separate report, the Census Bureau said durable goods orders rose 1.8% month over month in September, or $6.3 billion, to $345.4 billion, following an August increase revised to 0.1%. Transportation equipment led the rise, with orders increasing 4.6% to $119.8 billion. The economic data were released alongside developments in the ruling but are unrelated to the court’s decision. The next advance report on durable goods, covering October data, is scheduled for November 25, 2026, at 8:30 a.m. Eastern time.