On October 16, 2024, the Bank Policy Institute and the Clearing House Association filed a motion to intervene in Corner Post, Inc. v Board of Governors of the Federal Reserve System. On July 1, 2024, the Supreme Court sided with Corner Post in holding that a Section 702 claim under the Administrative Procedure Act (APA) to challenge a final agency action first accrues when the plaintiff is injured by final agency action and has the right to assert it in court.

The case involves debit card interchange fees, which are the fees a merchant pays to the debit card issuing bank when it accepts debit card payments from customers. When a debit card is tapped, dipped or swiped, the transaction is sent to the merchant acquirer whose issuing bank submits the card transaction to the appropriate payment card network, the network sends the transaction to the card issuing bank, and the card issuing bank sends the funds though the network back to the merchant and debits the cardholder’s deposit account for the transaction amount. The interchange fee is set by the payment card network.

Regulation II Enacted in 2011

The debit card interchange fee cap was part of the so-called “Durbin Amendment” to the Dodd-Frank Act, which required the Federal Reserve Board (“FRB”) to promulgate a regulation applicable to banks having more than $10 billion in assets establishing maximum debit card interchange fees that are “reasonable and proportional to the to the cost incurred by the issuer with respect to the transaction.” On June 29, 2011, the FRB issued Regulation II, which provides that the maximum interchange fee an issuer can receive from a single debit card transaction is 21 cents plus 5 basis points multiplied by the amount of the transaction. This rule also allows issuers to raise their interchange fees by as much as one cent if they implement certain fraud-prevention measures. At that time, large merchants claimed that savings would be passed on to consumers. However, those promised discounts have not materialized.

Proposed Changes to Regulation II

In October 2023, the FRB issued a proposed rulemaking to lower the maximum interchange fee that a large debit card issuer can receive for a debit card transaction. Under the proposed rulemaking, the base component would decrease from 21 cents to 14.4 cents, the ad valorem component would decrease from 5.0 basis points (multiplied by the value of the transaction) to 4.0 basis points (multiplied by the value of the transaction), and the fraud-prevention adjustment would increase from 1.0 cents to 1.3 cents for debit card transactions subject to the interchange fee cap. We doubt the FRB’s proposed rulemaking will satisfy Corner Post as it argues that that the Durbin Amendment requires a case-by-case approach to determine whether an interchange fee is reasonable and proportional, not a single standard as the FRB adopted or is currently proposing in the current rulemaking. See a related Law360 Article called “Fed’s New Swipe At Debit Fees Stirs Up Dilemma For Banks.”

In February, the banking industry groups wrote the FRB and urged to them to withdraw its debit card interchange proposed rule. The groups informed the FRB that:

  • The proposal is based on a “flawed and incomplete 2021 data set, which reflects anomalous pandemic-related payment behavior” and does not factor in the changes made to debit routing in July 2023 (requires online/card not present debit card transactions to be enabled for processing on at least two unaffiliated payment card networks). The ABA Letter suggests the Federal Reserve could instead use the 2023 survey data that will be available in early May.
  • The biennial automatic adjustments of the cap are inappropriately excluded from notice and comment.
  • Smaller institutions are more impacted by a 30% reduction in debit interchange, which will likely lead to further consolidations. Interchange for smaller institutions that were exempt from the cap on debit card interchange fees decreased 35% from 2011-2022.
  • This proposal will increase the cost of checking accounts and other basic banking services.

The Consumer Bankers Association commissioned a white paper on debit card interchange fee limits and the potential implications if the proposal to reduce debit interchange caps is finalized. The key findings from the white paper included:

  • Data supports that free accounts became less common, minimum monthly balance rose, and “monthly maintenance fees increased in an amount equal to 42% of the overall reduction in interchange revenue” when bank interchange revenue dropped;
  • Economists conclude that it is “virtually impossible” to prove or measure any merchant or consumer savings; and
  • Consumers can expect to pay an extra $1.3 billion to $2 billion annually in bank account fees through higher monthly maintenance fees or increases to other service fees.

The FRB has not finalized the proposed rule.

Corner Post Lawsuit

This case involves a convenience store merchant, Corner Post, Inc., that opened its truck stop business in 2018. In 2021, Corner Post sued the FRB seeking to invalidate Regulation II, which was enacted in 2011 to cap interchange fees charged by debit card issuers. The complaint alleges that issuers continue to profit from debit card fees at retailers’ and consumers’ expense notwithstanding the requirement that the fees be reasonable and proportional. The plaintiffs argue that the Durbin Amendment requires a case-by-case approach to whether an interchange fee is reasonable and proportional, not a single standard as the FRB adopted in 2011.

The district court dismissed the case as time-barred and ruled that the six-year statute of limitations for bringing facial APA claims (28 U.S.C. § 2401(a)) begins to run when a final rule is issued. This meant that the limitations period had run well before Corner Post had opened its doors for business. The Eighth Circuit affirmed the district court’s decision.

The Supreme Court reversed and remanded the case to the Eighth Circuit because Corner Post filed the claim within six years of its injury and the FRB ultimately may need to defend Regulation II on the merits. If Corner Post’s challenge to the rule is successful, the FRB may be required to engage in a new rulemaking to change the calculation of debit card interchange. Following remand from the Supreme Court and Eighth Circuit, the lower court issued a scheduling order for summary judgment briefing—beginning with Plaintiff’s brief on November 15, 2024, followed by the FRB’s brief on January 10, 2025.

Motion to Intervene

In their motion, the Bank Policy Institute and the Clearing House Association argue associational standing on behalf of the financial institutions they represent who are directly regulated by Regulation II and whose interests will not be adequately represented by the FRB. Associational standing allows an association representing members with standing to bring the case to court. To satisfy the requirements for associational standing, they must show that “(a) its members would otherwise have standing to sue in their own right; (b) the interests it seeks to protect are germane to the organization’s purpose; and (c) neither the claim asserted nor the relief requested requires the participation of individual members in the lawsuit.” Kuehl v. Sellner, 887 F.3d 845, 851 (8th Cir. 2018).

The proposed intervenors cite to Rule 24(a) that states “a court must permit anyone to intervene who: (1) files a timely motion to intervene; (2) claims an interest relating to the property or transaction that is the subject of the action; (3) is situated so that disposing of the action may, as a practical matter, impair or impede the movant’s ability to protect that interest; and (4) is not adequately represented by the existing parties.” They argue each factor is easily satisfied and conclude with the following arguments:

Proposed Intervenors’ members “directly participat[e]” in the debit card market regulated by Regulation II and are subject to the fee cap which Plaintiff seeks to change. Proposed Intervenors will therefore “provide important perspectives, substantial expertise, and experience that will aid the Court in its consideration of the issues.” Indeed, for these very reasons, Proposed Intervenors were permitted to participate in the previous merchant challenge to Regulation II in NACS. Accordingly, should the Court decide not to grant mandatory intervention, it can and should allow permissive intervention by Proposed Intervenors.

As the Corner Post decision will impact all financial institutions that are subject to regulated debit card interchange, we expect the court will allow the either the mandatory or permissive intervention.

Illinois Interchange Fee Prohibition Act

Also, in Illinois, the Illinois Bankers Association, American Bankers Association, America’s Credit Unions, and Illinois Credit Union League are challenging the enactment of the Interchange Fee Prohibition Act (IFPA), which would prohibit the collection of debit and credit card interchange fees for sales taxes, excise taxes and gratuities if the merchant informs the acquiring bank of the amount of these taxes and gratuities. The IFPA will become effective on July 1, 2025. In addition, the groups have filed for injunctive relief to block the IFPA from taking effect. On October 4, 2024, the Illinois Attorney General brought a motion to dismiss for failure to state a claim. On October 2, 2024, the OCC filed an amicus brief in support of the plaintiffs arguing that the National Banking Act preempts the state’s IFPA because the IFPA’s restrictions on interchange fees and data usage significantly interferes with national banks’ exercise of their power to process electronic payment transaction data. The OCC emphasized that the IFPA would impose operational burdens on national banks and disrupt payment systems. (This is the first brief filed by the OCC regarding national bank preemption in the aftermath of the Cantero case.) Separately, Senator Dick Durbin filed an amicus brief in support of Illinois and the Bank Policy Institute, Consumer Bankers Association and The Clearing House Association filed an amicus brief in support of the plaintiffs. Plaintiffs filed their reply brief on October 11, 2024 and the Attorney General filed its reply brief on October 18, 2024. The Court will hear oral argument today on the pending motion for a preliminary injunction.