WASHINGTON — A federal appeals court heard arguments Thursday in a challenge to the Federal Reserve’s debit interchange fee caps, a case that could have significant implications for credit unions and other debit card issuers and potentially set the stage for a U.S. Supreme Court review, according to an analysis by America’s Credit Unions.
The Sixth U.S. Circuit Court of Appeals heard oral arguments in Linney’s Pizza v. Federal Reserve, a lawsuit brought by a small business challenging the Federal Reserve’s authority to include certain costs when calculating debit interchange fee caps under Regulation II.
America’s Credit Unions, which filed an amicus brief in the case in June, said the dispute centers on whether the Federal Reserve exceeded its authority under the Durbin Amendment by including expenses beyond incremental authorization, clearance and settlement (ACS) costs in determining permissible interchange fees.
The Arguments
According to America’s Credit Unions, Linney’s Pizza contends Congress established a strict two-category framework for determining allowable costs and did not authorize the Fed to include a third category of discretionary expenses.
Among the costs being challenged are:
- Fixed overhead expenses associated with authorization, clearance and settlement.
- Network processing fees.
- Fraud losses.
The Federal Reserve, meanwhile, maintains that the Durbin Amendment’s requirement that interchange fees be “reasonable and proportional” gives the agency discretion to consider operational expenses directly associated with processing debit transactions, even when those costs are not strictly incremental.
Potential Windfall for Merchants
In its amicus brief, America’s Credit Unions argued that adopting Linney’s Pizza’s interpretation of the Durbin Amendment would provide merchants with a financial windfall at the expense of card issuers and consumers.
The trade association said that interpretation would conflict with the statutory language, structure and purpose of the Durbin Amendment, as well as established principles of constitutional and statutory interpretation.
America’s Credit Unions has maintained that debit interchange fee caps must account for the actual costs financial institutions incur in providing debit card services.
Potential Supreme Court Review
According to the association’s analysis, a ruling in favor of Linney’s Pizza could create a split among federal appeals courts over the proper interpretation of Regulation II, increasing the likelihood that the Supreme Court would ultimately consider the issue.
If the Sixth Circuit adopts the merchant’s interpretation, the Federal Reserve could be required to exclude fixed overhead and network-related expenses from its interchange fee calculations.
Such a decision could result in significantly lower debit interchange fee caps, potentially reducing interchange revenue for affected financial institutions, America’s Credit Unions said.
Related Legal Challenge
The association noted the case is closely related to Corner Post v. Federal Reserve, another legal challenge involving the Fed’s debit interchange regulations.
America’s Credit Unions filed an amicus brief in that case in January, arguing that a district court’s interpretation of the Durbin Amendment would require the Federal Reserve to establish interchange fee caps substantially below the actual costs incurred by debit card issuers.
The association has opposed interpretations of the law that would further restrict the expenses financial institutions may recover through debit interchange fees.
The Sixth Circuit has not issued a ruling in Linney’s Pizza, and the outcome could have implications beyond the immediate dispute, including how the Federal Reserve calculates interchange fee caps in the future.
