The Federal Reserve’s debit card interchange rule doesn’t follow the intent of Congress in setting a limit for swipe fees, an appellate court ruled Monday.

The Federal Reserve has improperly determined rules for setting a fee cap on debit card transactions, a federal appeals court ruled Monday in vacating the central bank’s current 21-cent fee limit.

The decision by a three-judge panel of the Eighth Circuit U.S. Court of Appeals – which backed a lower court ruling from last year – represented a victory for merchants that have battled payment card swipe fees for years.

Plaintiffs alleged that the Federal Reserve System Board of Governors should have set a debit card interchange standard that considers only an issuer’s marginal costs for a transaction, not the fixed expenses that come with its overall business. Any costs “not specific to a particular electronic debit transaction” shouldn’t be used by the Fed to set the debit fee cap, the court found in reading the statute.

That type of cost distinction within the Fed’s Regulation II rules is what Congress intended in 2010 when it added the Durbin Amendment to the Dodd-Frank Wall Street Reform and Consumer Protection Act, the St. Louis-based appeals court said.

The Fed’s current debit card fee structure includes far more than the marginal cost for each debit transaction, and disregards Congress’ intent when it enacted the amendment, the appeals court panel wrote in its ruling.

The Fed’s rate cap included banks’ “fixed costs related to authorization, clearance, and settlement,” along with network processing fees, costs for fraud prevention and for losses due to fraud, the appeals court said.

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