- Regulation II, implementing the Durbin Amendment, caps large-bank debit interchange fees and the Fed has proposed lowering the cap further with automatic biennial updates.
- Banking groups argue the proposed lower cap understates issuer costs, threatens free or low-cost checking, and will push banks to raise other consumer fees.
- A federal district court in Corner Post v. Fed vacated Regulation II’s universal cap for exceeding statutory authority, but the ruling is stayed pending appeal.
- Evidence suggests merchants largely did not pass interchange savings to consumers, while debit volumes and fee levels for covered issuers have remained stable since Regulation II took effect.
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The body of regulation known as Regulation II represents the Federal Reserve’s implementation of the Durbin Amendment (Dodd-Frank, 2010), which aimed to ensure that debit-card interchange fees are “reasonable and proportional” to issuer costs. As of 2011, it capped fees at 21¢ base + 0.05 % of transaction amount + 1¢ fraud adjustment—categories defined by law. [1][7] Over time, the Fed has published biennial data showing that total transaction volume and value of debit and general-use prepaid card purchases are rising, though at slower annual growth than the pre-Regulation II period (2009-2021) and fee levels have stayed fairly steady for covered transactions. [4][2]
In late 2023, the Fed proposed lowering the cap to 14.4¢ base + 0.04 % of value + 1.3¢ fraud adjustment, also instituting a mechanism to update the cap biennially. This reflects asserted reductions in issuer costs and changing payment infrastructure. [8] Banking associations strongly opposed this proposal, arguing that it underestimates costs—especially for smaller institutions—and would lead to increased consumer fees and erosion of low- or no-cost deposit services.
Legally, a recent court decision vacated Regulation II’s cap standard. In Corner Post v. Board of Governors of the Federal Reserve System (2025), a district court held that the Fed acted beyond authority by imposing a universal cap, including improperly broad cost categories, rather than issuer- and transaction-specific determinations. However, implementation is paused (stay issued) while the Fed appeals; meanwhile the proposed lower cap remains pending. [12][11]
Strategically, these developments have complex implications. Merchants would benefit from lower debit interchange cost structures, but to the extent discounts are not passed to consumers, the social welfare impact is diminished. Issuers—especially smaller ones—could see compression of revenue and may shift cost recovery onto consumers. Litigation risks and regulatory uncertainty raise challenges for both financial institutions and merchants. The court’s insistence on transaction-issuer specificity could dramatically increase compliance and monitoring costs, or force a redesign of fee models.
Open questions include: whether decreased cap proposals will survive appeal or be replaced by issuer-specific models; how much impact lower debit caps truly have on overall consumer prices; whether issuers will offset lost revenue via non-interchange fees; and whether regulatory reform will be synchronized with similar pressure on credit card interchange fees.
Supporting Notes
- In 2023, U.S. payment networks processed around 100.7 billion debit and general-use prepaid card transactions worth about $4.7 trillion; interchange fees totaled $34.12 billion—a ~3.9 % annual increase since 2021. [4]
- Covered-issuer (banks with ≥ $10 billion in assets) transactions have average interchange fees of ~$0.24 on single-message networks and ~$0.22 on dual-message networks in 2023; these levels have “not changed materially” since Reg II took effect in 2011. [4]
- The proposed 2023 Fed rule would lower the cap from base 21¢ + 5 bps + 1¢ fraud to 14.4¢ + 4 bps + 1.3¢ fraud adjustment, and create a biennial update process tied to issuer cost data. [8]
- Bank/CU associations warn that many smaller issuers wouldn’t recover costs under the new cap; they assert that Reg II has already reduced free checking from ~60 % of institutions to less than 20 %.
- Court in Corner Post vacated Reg II’s standard, finding the Fed wrongly included fixed automated clearing/switching (ACS) costs, network processing fees, transaction-monitoring and fraud losses; and that the universal cap conflicts with statutory requirement for issuer- and transaction-specific fee standards. [11]
- The Progressive Policy Institute reports that merchants rarely pass savings from lower debit interchange onto consumers: in one study only ~1.2 % of merchants reduced prices one year post cap implementation, ~21.6 % raised them, ~77.2 % made no change. [7]
Sources
- [1] www.federalreserve.gov (Federal Reserve) — May 17, 2024
- [2] www.federalreserve.gov (Federal Reserve) — December 19, 2025
- [4] www.oba.com (Oklahoma Bankers Association) — December 31, 2025
- [7] www.progressivepolicy.org (Progressive Policy Institute) — December 11, 2025
- [8] www.gtlaw.com (Greenberg Traurig) — October 25, 2023
- [11] www.cooley.com (Cooley LLP) — August 15, 2025
- [12] www.reuters.com (Reuters) — August 7, 2025
- www.icba.org (ICBA) — May 10, 2024