The Debit Divide: Courts, Cards, and Change

In this week's edition of Today in Payments, Patti Murphy and James Shepherd unpack the growing legal battle over debit card caps, as conflicting rulings from Kentucky and North Dakota courts set the stage for a potential Supreme Court case. They also cover Discover’s proposed settlement over misclassified cards, SoftBank’s AI-powered PayPay launch, Klarna’s IPO plans, and the ongoing decline of B2B check usage.

Welcome to Today in Payments, I’m your host, Patti Murphy, here with your weekly dose of payments notes.

Dueling Rulings on Fed’s Debit Interchange Cap

A federal district court judge in Kentucky has upheld the Federal Reserve Board’s debit card interchange cap—an opposite outcome from a ruling last month by a federal district court judge in North Dakota. That earlier decision is currently on hold pending appeal.

The Fed was tasked with setting a debit card interchange cap under the Durbin Amendment to the Dodd-Frank Act. The cap was set at 21 cents plus 5 basis points, with a 1-cent fraud prevention adjustment.

Last month, a judge in the U.S. District Court for the District of North Dakota sided with Corner Post, a truck stop and convenience store that sued the Fed over the cap. The judge stated that the Fed misinterpreted the law and that the cap should have been much lower. He ruled that the Fed "improperly interpreted" the Durbin Amendment’s instructions for setting the debit card cap. According to the judge, the Fed included prohibited costs—such as network fees, transaction monitoring costs, and fraud losses—when determining the base fee. The only costs that should have been included, he argued, are authorization, clearing, and settlement.

In contrast, the more recent ruling came in a case brought by Linney Pizza in Frankfort, Kentucky. The judge in that case ruled that the Fed had sufficiently justified its actions and noted that Linney’s failed to recognize the Fed’s responsibility to balance competing interests when establishing the cap.

A separate 2023 proposal to lower the debit interchange cap to 14.4 cents is still pending before the Fed Board.

Discover Class Action Settlement Proposed for Misclassified Transactions

Visa and Mastercard aren’t the only card companies facing lawsuits over pricing. A proposed class-action settlement has been reached in three related lawsuits involving Discover, according to a press release from the U.S. District Court for the Northern District of Illinois.

The lawsuits allege that, from 2007 through 2023, Discover misclassified certain consumer credit cards as commercial credit cards, which in turn caused merchants and others to incur excessive interchange fees. The misclassification did not impact cardholders. Discover denies the claims in the lawsuits, and the Court has not decided who is right or wrong. Instead, the proposed settlement—if approved—will resolve the lawsuits and provide benefits to Settlement Class Members.

The Settlement Class includes all end merchants, merchant acquirers, and payment intermediaries involved in processing or accepting the misclassified card transactions between January 1, 2007, and December 31, 2023.

A dedicated website has been set up for updates, FAQs, and electronic claims filing:
www.discovermerchantsettlement.com

SoftBank Seeks IPO for Payment Platform PayPay

There’s a new name to watch in digital payments: PayPay. In August, Japanese banking giant SoftBank announced it had “confidentially submitted” an application for a U.S. IPO for its payment platform, according to an article in IBM Think.

What makes PayPay a serious contender—even against the likes of Apple Pay, PayPal, and Venmo—is its advanced AI capabilities, according to Kamini Belday, Strategic Growth Leader for AI, Payments, and Service Alliances at IBM.

Belday told IBM Think that SoftBank’s move is a smart bet, given its strong AI track record. “There is always room for platforms that solve real pain points with precision,” she said. “The platforms that master AI will reduce fraud losses, expand credit access, and deepen customer loyalty through personalization. What SoftBank is attempting with PayPay isn’t just market entry—it’s ecosystem disruption,” she added.

Consumer Spending Growth: Some Good News

The Federal Reserve Bank of New York reports that household spending growth slowed in August to its weakest pace since 2021. The year-over-year increase in monthly nominal household spending declined to 4.1% in August, down from 4.5% in April. However, big-ticket purchases rose.

The decline was broad-based across age and income levels, with the largest drop among those without college degrees.

While overall spending growth declined, the share of consumers participating in the Fed’s survey who made at least one large purchase in the previous four months increased—from 53.5% in April to 60.8% in August. Purchases of electronics, home appliances, furniture, home repairs, homes, vehicles, and vacations all saw increases.

Check This Out

A new report from the Association for Financial Professionals suggests that businesses may finally be weaning themselves off checks.

In the U.S. and Canada, B2B check usage is down 7%. In 2022, 33% of B2B payments were made by check. This year, it’s 26%. The report was underwritten by JPMorgan Chase.

But checks are like a drug—many businesses still find them hard to quit. A recent news story out of Baltimore illustrated the point: a small business is struggling because most of its clients still pay by check, and those checks are being stolen from the mailbox. When asked why they don’t accept cards, the owner said they do—but their trading partners prefer checks. Wow. Really?

That’s all for Today in Payments. Stay tuned for your weekly dose of payments notes.