2025 Durbin Amendment Ruling: Court Overturns Debit Fee Caps - What Small Businesses Must Do Now to Protect Profits
Your Margins Are On the Line
For years, U.S. merchants have felt the squeeze from hefty debit card interchange fees, those seemingly small charges that add up and chip away at their profits. These fees, set by big banks and monitored by the Federal Reserve thanks to the Durbin Amendment, have a direct impact on the overall cost of doing business.
In place since 2011, the Durbin Amendment aimed to ensure that debit interchange fees were "reasonable and proportional" to the actual costs incurred by banks for every transaction. The amendment also required that at least two unrelated networks be available for debit processing and exempted smaller banks with assets under $10 billion.
However, a recent ruling by a federal judge on August 7, 2025, may be changing the game. The judge found the Fed had overstepped its authority, which effectively suspends the rules set in Regulation II under the Durbin Amendment. This decision is currently on hold as the Fed appeals. Still, it raises questions about the future of debit card fee regulations and their potential impact on related costs, which could affect billions of dollars in payment processing costs.
One way or another, this could fundamentally change how debit card transaction fees are set and charged to merchants across the U.S. If the ruling stands, it may lower costs for small businesses, but it may also cause the banking industry to push back with new account fees, charges, or changes to operations that add other unregulated expenses. Or, nothing changes at all. Only time will tell.
It's a significant moment, and while it's far from over, you need to understand how this could impact your business. Here are the details and additional resources to help you complete your homework.
The Durbin Amendment (2010) and Regulation II
The Durbin Amendment was enacted in 2010 as part of the Dodd-Frank Act. It directs the Federal Reserve to limit debit card interchange fees, commonly known as "swipe fees", so they are "reasonable and proportional to the issuer's cost". It also mandates that at least two unaffiliated networks be available for routing each debit transaction and exempts smaller financial institutions (with assets under $10 billion) from the fee cap.
Regulation II: In 2011, the Fed implemented these rules, setting the cap for large banks at $0.21 per transaction, plus $0.01 for fraud prevention and 0.05% of the transaction amount for fraud-loss recovery.
KEY ELEMENTS
Interchange Fee Cap: Intended to be limited to incremental costs (e.g., authorization, clearing, settlement).
Network Competition: Requires dual-network routing.
Small Institutions Exemption: Banking institutions under $10 billion are exempt.
What Happened on August 7, 2025?
As for what happened on August 7, 2025, U.S. District Judge Daniel Traynor from North Dakota vacated the Federal Reserve's Regulation II. He found that the Fed had exceeded its authority by including costs related to fraud prevention and fixed expenses, rather than sticking strictly to the incremental costs associated with processing transactions.
Stay in place: Currently, this ruling is "stayed" or on hold, meaning it's not yet in effect. This gives the Fed some time to appeal and also prevents a potentially chaotic unregulated interchange market.
Context: Before the ruling, the Fed had already suggested a 30% reduction in the fee cap in its 2023 rule proposal, which would lower the rate from $0.21 to $0.144, adding to the complexity of the situation.
Judges' Rationale: Judge Traynor held that the Durbin Amendment allows recovery for only authorization, clearing, and settlement (ACS), which are directly associated with transaction processing. He criticized the Fed's broader approach as overreaching and emphasized the importance of adhering to the law over agency discretion.
Pros
Potential Reduction in Costs If the ruling stands, it could significantly lower interchange fees. Merchants argued that under the Fed's 2011 cap, banks earned far more than their actual costs. A 2021 Fed survey found that average allowable costs were just $0.039, making the current cap of $0.21 almost five times higher.
Fairer Pricing Aligned with Cost. The rulings that focus on issuer- and transaction-specific costs, which could result in more equitable rates, which is more favorable than a uniform, broad-based cap.
Opportunity to Review Payment Setup. With changes on the horizon that may lead to a reduction in "swipe fees" but could cause financial pain for others, it's a great opportunity to reassess your current payment processing setup. Switching providers or networks may yield better economics both now and in the future, especially since systems like Square become less attractive due to flat, inflexible rates and network limitations.
Cons
Short-Term Uncertainty With the ruling stayed and appeals pending, the future regulatory environment remains unclear. Merchants cannot be certain whether Regulation II will be rewritten or entirely repealed, which can lead to indecision. Bottom line, it's always a good idea to look to lower operating costs.
Potential Indirect Cost Shifts: Banks argue that without fraud and fixed-cost components in the cap, they may raise fees elsewhere, such as through checking account maintenance fees, fewer free checking options, or shifts toward credit product pushes (e.g., overdrafts). If the ruling stands, it could result in higher overall costs.
Possible Cost of Innovation & Security: Banking industry groups warn that excluding fraud and system-maintenance costs may disincentivize investments in security or payment innovations, potentially shifting some of the burden to merchants if systems become less robust. Another area of major concern is how these costs, when passed on to you in a larger way, will affect your business.
Why Merchants Should Review Their Current Setup (Especially Big Platforms) Now
Greater Control over Costs: With regulatory changes looming, merchants who control routing, negotiate interchange, or choose processors with more favorable pricing (or tiered/volume-based models) can better manage their margins and prepare for potential headwinds before they arise. You'll also benefit from any positive cash-flow changes now.
Avoiding Vendor Lock-In: Platforms like Square, Stripe, or even Shopify bundle processing, software, and hardware, but often at flat, convenience-based rates. If interchange fees drop or become more variable, being tied to a fixed-cost provider could be economically suboptimal.
Flexibility to Pivot Quickly: If the Fed's rulemaking or the appeal alters cost structures rapidly, having flexible arrangements (e.g., direct acquirer contracts, multiple routing paths) provides agility.
Opportunity for Strategic Negotiations: Merchants with leverage, especially regional or chain businesses, can negotiate with networks or issuers based on anticipated fee shifts or appeal outcomes.
Example: Why Reviewing Your Setup Matters (vs. Square) Before Rules Change
Cost Management & Transparency: Square delivers convenience, but its flat-rate pricing may mask margin erosion if interchange rates drop. Direct negotiation with a processor can help realize cost savings
Routing Flexibility: Regulation II's network competition could create opportunities, such as merchant-controlled routing (e.g., dual processors), which might unlock cost advantages and would likely not be available on Square.
Adaptability to Change: If interchange fees decline or become issuer-specific, a flexible system allows merchants to pivot quickly. If you're already working with a partner like PayStream, we can help ensure minimal disruption and a highly positive outcome.
Final Thoughts
The August 2025 ruling marks a pivotal development in U.S. debit card regulation. If upheld, it could reshape interchange economics, favoring merchants with lower, fairer fees that are reflective of actual incremental costs. As a small business, this is a good time to critically evaluate your current credit card processing systems and consider alternatives that offer more control and better pricing, while preparingg you for a landscape where interchange may no longer be a static, inflated cost.
By understanding the regulatory mechanics and acting proactively, merchants can better position themselves for both stability and cost efficiency, whether Regulation II stays, is revised, or ultimately gets replaced.
On judge vacating Reg II Payments Dive
Summary of ruling and appeal status Reuters
NRF announcement and cost context National Retail Federation
NACS on statutory interpretation and impact Convenience
Legal analysis and implications PYMNTS.com
Durbin Amendment and Reg II background Wikipedia
FAQs About Credit Card Processing Costs
Q: What exactly did the court rule in August 2025?
A: Judge Traynor of the District of North Dakota vacated Regulation II, which is the Federal Reserve's rule limiting interchange fees. It was vacated on the grounds it included costs for fraud prevention and fixed costs that were not authorized by the Durbin Amendment. The decision is stayed or "on hold" pending an appeal by the Fed.
Q: What is Regulation II, and why was it controversial?
A: Regulation II is the Fed's 2011 implementation of the Durbin Amendment. It capped debit interchange fees for large banks at 21 cents per transaction plus fraud-related components. It is controversial because critics argued the cap was overly generous and that it far exceeding actual incremental costs incurred by banks. The 2025 ruling supports that view.
Q: What costs are allowed under Durbin?
A: According to the statute (and endorsed by the recent ruling), fees may only reflect incremental costs of authorization, clearing, and settlement (ACS). Fraud, fixed overhead, or monitoring costs are not authorized under the Durbin Amendment.
Q: How do these fees impact merchants and consumers?
A: Before the Durbin Amendment and Reg II, average swipe fees were $0.44 per transaction. Upon enactment, merchants saved an estimated $9 billion annually. Presumably, some of those savings were passed to consumers with slightly lower prices. It is important to note however, especially since fees are increasingly passed to consumers, in 2024 swipe fees still totaled $38.7 billion showcasing that even with Durbin, fees are a significant cost for merchants and consumers.
Q: What's next legally?
A: The Federal Reserve is expected to appeal (which is why the ruling is "stayed") to the Eighth Circuit Court of Appeals, and potentially, the U.S. Supreme Court, given the high stakes and legal implications
Q: Should small merchants switch from Square or similar platforms now?
A: It depends. With regulatory uncertainty, merchants may benefit from exploring options that offer greater control over routing, pricing, and fee negotiation. Platforms that allow customization or direct acquirer access may offer long-term advantages if interchange rates fall or become more variable.
Q: Will banks reduce fraud/security investments?
A: Banking groups warn excluding fraud and fixed costs from interchange could disincentivize investment in robust security systems. Merchants need to monitor whether such investments decline and/or add new and more expecnsive costs ultimately shifting risk back to them.
Q: What should merchants do next?
A:
Review current processing agreements to understand your fee structure and flexibility.
Start exploring alternative providers or negotiating better terms. This is always a good idea and we’d be happy to chat with you, you can starty by booking a consultation with PayStream.
Stay informed about appeal developments and Fed rulemaking.
Prepare for possible future models like issuer- or transaction-specific fees or less robust security without more expensive buy-in.
PayStream is your trusted partner in payment optimization. From fee audits to compliance assistance, we’ll handle the hard stuff so you can focus on running your business.
📞 Contact us today to schedule your FREE consultation and start saving in 2025!
Sources: Reuters, Payments Dive, PYMNTS, NRF, ABA Banking Journal, Convenience.org (NACS), VitalLaw, Credit Union Times, Wikipedia