Debit Fee Fight Pushes US Banks Toward Alternative Payment Rails
The dispute stems from the 2010 Durbin Amendment, which directed the Federal Reserve to ensure debit interchange fees charged by large issuers are reasonable and proportional to transaction costs. The Fed’s 2011 Regulation II capped fees at 21 cents per transaction plus 0.05% of the purchase value, with a separate one-cent fraud-prevention adjustment. Merchants say the formula improperly includes fixed processing and fraud-related expenses, while banks argue deep cuts would undermine free checking, rewards and investment in fraud controls.
On August 6, 2025, the U.S. District Court for the District of North Dakota vacated Regulation II but stayed its ruling during the appeal. The Eighth Circuit heard oral arguments on May 13, 2026, and a decision is pending. If the court upholds the merchants’ win, the cap could move toward issuers’ average incremental authorization, clearing and settlement costs of 4.1 cents, putting the practical rate near five cents per transaction. The potential revenue hit is pushing banks to examine instant-payment, account-to-account and other processing rails as alternatives to traditional debit networks.
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The history behind this eventMerchants Challenge Fed Debit-Fee Cap, Putting Big-Bank Revenue at Risk
Congress enacted the Durbin Amendment as part of the 2010 Dodd-Frank Act, directing the Federal Reserve to ensure debit-card interchange fees are reasonable and proportional to issuers’ costs. Regulation II, adopted in 2011, capped the base fee for banks with at least $10 billion in assets at 21 cents per transaction, plus 0.05% of the purchase value and a potential 1-cent fraud-prevention adjustment. The rule made debit interchange a regulated but still important revenue stream for large retail banks.
Kentucky merchant Linney’s Pizza sued the Fed in 2022, arguing that Regulation II unlawfully counts fixed and network-processing expenses beyond transaction-specific authorization, clearing and settlement costs. A federal district court upheld the rule on Sept. 12, 2025, but the merchant appealed, completing briefing at the Sixth U.S. Circuit Court of Appeals on July 13, 2026. A reversal could force the Fed to impose a lower cap, threatening fee income at major debit issuers including JPMorgan Chase and Bank of America.
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