Could Government Price Caps On Debit Cards Be Overturned – Bringing Back Debit Card Rewards?

The Durbin Amendment to Dodd Frank financial reform legislation slipped in something completely unrelated to preventing future financial crises – it was a giveaway to retail merchants: capping interchange fees for debit card transactions.

Banks would no longer be able to make money on debit cards.

  • That’s why we no longer have broad-based debit card rewards. Those really just exist for debit products that are exempt from the rule. Whereas it used to be common to earn 1 mile per dollar spent on debit (or at least 1 mile per $2 spent), it’s no longer profitable for banks to incentivize these transactions and so they don’t.

  • Banks used to make money on debit cards, so they wanted people to open checking accounts. After their ability to make money on debit transactions was eliminated, free checking for many customers was no longer profitable. We started to see minimum balance and payroll direct deposit requirements to waive checking fees. Many customers were pushed out of traditional banking and over to check cashing stores.

Senator Dick Durbin is trying this again with credit card legislation. In the meantime, though, the Federal Reserve – whose rule capped debit fees at 21 cents per transaction in most cases – has proposed to reduce the fee even further to 14.4 cents citing lower processing costs.

However the Supreme Court heard a challenge to the Durbin Amendment. Specifically, they’re expected to rule on whether a new challenge to the Durbin Amendment is too late.

  • Typically new regulations have to be challenged within six years
  • That’s a different approach than most time-barring rules
  • Normally the clock starts ticking once harm becomes known

These rules went into effect in 2011. A retailer that started its business in 2018 says they should be able to challenge the rules, but they did not exist once the normal six year limit had lapsed. They claim that the specific limits in the final rule were arbitrary and not well-backed. I won’t express a view on that claim, not having studied it closely enough. For now, though, the question is whether that challenge may move forward.

The store, called Corner Post and located in Watford City, appealed after lower courts threw out its lawsuit on the basis of missing the six-year statue of limitations that generally applies to such litigation. Corner Post argued it should not be bound by the statute of limitations because it opened for business in 2018, meaning its legal injury arose only after the deadline had passed.

If allowed to proceed, that opens the floodgates to challenge federal rules. If they’re illegal, shouldn’t they be challenged? Critics argue that it’s more important to settle law.

During oral argument, Justices Kagan and Katanji-Brown expressed skepticism of the suit, while Justice Gorsuch (“The normal rule – and I think you’d have to concede it – is that the plaintiff’s injury is the moment of accrual”) and Chief Justice Roberts (“You’re saying, ‘Well, that’s just too bad, you can’t do anything about it because other people had six years to do something about it”) appeared supportive.

If the lawsuit is permitted to go forward, and then if if prevails, it would have huge implications for the potential return of debit card rewards.

(HT: Paul H)

About Gary Leff

Gary Leff is one of the foremost experts in the field of miles, points, and frequent business travel - a topic he has covered since 2002. Co-founder of frequent flyer community, emcee of the Freddie Awards, and named one of the "World's Top Travel Experts" by Conde' Nast Traveler (2010-Present) Gary has been a guest on most major news media, profiled in several top print publications, and published broadly on the topic of consumer loyalty. More About Gary »

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  1. The rule of law is already messed up in the US courtesy of this activist Supreme Court run by Republicans. Just look at the mental gymnastics that went into the Republican-appointed Justices overturning Roe v Wade after 40+ years of it being the settled law of the land.

    Don’t like a 7+year old regulation? Then we have to get Congress to pass into law an explicit overturning of regulations opposed by a majority or super-majority. That or pass a law that doesn’t time bar lawsuit challenges to long-established regulations.

  2. Ooo that’d be great… had a great bunch of years racking up AA Miles (thanks to Gary and his tip for that online Texas bank) , back in the late 00’s

  3. Activist Supreme Court rulings overturning activist Supreme Court rulings. Back to square one. Let the states decide.

  4. Boo on this.

    Who wants more inflation and prices going up even more? They should be cutting credit card fees instead!!!

    Merchant clearing is not a competitive market so even though transactions have never been more secure, merchant fees have never been higher.

  5. No way am I ever using a debit card, where if someone compromises your account number that person can empty your checking account and any other account that backs it up, and you have to fight to get your money back; meanwhile, your mortgage check bounces. I have an ATM non-Visa card for getting money from the machine only.

    With a credit card it’s just a posting on your statement. No money has been taken from you, and you can dispute the charge.

  6. Dick Durbin seems to at least believe in the rule of law, constitutional order and democratic norms. Those who shriek more about Durbin than about the “former guy” and his his “see no evil, hear no evil, say no evil” co-partisans in Congress, judicial appointees and fellow travelers have jumped the shark when it comes to consumer protection.

  7. The average regulated bank (those with over $10bn in assets, of which there are less than 200 according to the Fed’s 2021 debit interchange report) earn 5.7x average cost they incur for processing debit (issuer ACS cost is about 4c and interchange is currently capped at 21c + 0.05% transaction value). To claim “Banks would no longer be able to make money on debit cards” is at best misleading and at worst wholly incorrect. What other product maintains a price to cost ratio of 5.7x???

  8. @ carletonm – EXACTLY. I cannot fathom opening up my bank accounts to the fraud that exists with credit cards.

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