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D.C. Cir.: Federal Reserve Can Limit Debit Card Fees

By Jenny Tsay, Esq. on March 25, 2014 | Last updated on March 21, 2019

The D.C. Circuit recently decided that the Federal Reserve rule that limited the fees banks can charge merchants for debit card transactions is reasonable under the Dodd-Frank Act.

In NACS v. The Federal Reserve, the circuit court reversed the lower court's decision that found the Federal Reserve went outside its authority in setting a fee cap per transaction by misinterpreting the Dodd Act.

Dodd-Frank Act

The Dodd-Frank Act (a.k.a. The Dodd-Frank Wall Street Reform and Consumer Protection Act) was passed in 2010 and made reforms to federal financial regulatory agencies. Since the implementation of the Act by President Obama, it had its share of controversy and has been a big money-maker for BigLaw firms.

A provision in the Dodd-Frank Act directs the Board of Governors of the Federal Reserve to address the mounting and potentially excessive fees banks and debit card companies charge merchants and consumers. According to the opinion, debit card holders used their cards 37.6 billion times and yielded more than $20 billion in fees for banks and networks.

In response to the Act and the staggering numbers, the Federal Reserve issued regulations that put a cap on per-transaction fees banks receive. According to The Wall Street Journal, the highest fee cap was 21 cents per transaction -- before the Act, banks charged an average of 44 cents per transaction.

Court's Reasoning

Prior to appeal, the D.C. District Court held that the Dodd Act gave "clear regard" to what costs the Reserve may consider in setting the interchange fee standard, but can only consider incremental ACS costs of individual transactions. According to the opinion, ACS costs are "authorization, clearance, and settlement" costs that occur when a debit card is used in commerce.

However, the D.C. Circuit found that the Reserves' interpretation of the Act was correct in that the Board could consider more than just ACS costs. In fact, the court stated that the Board reasonably interpreted the act to allow issuers to recover additional costs beyond the ACS costs. So it's within the Reserve Board's duty to consider any costs banks or debit card companies may incur per merchant transaction when setting a fee cap.

The D.C. Circuit reversed the district court's grant of summary judgment to the merchants and remand for further proceedings consistent with the opinion.

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