Deep dive: debit fee caps

Durbin and the exempt-bank model

My view as of October 2026: for US consumer and small-business debit and prepaid, the Durbin exemption is still the single biggest number in the business case, worth roughly twice the interchange per transaction, and it explains why fintech sponsor banks are small. It matters much less for credit and commercial cards, it's losing some weight to bank risk and fee revenue, and the cap itself is in court.

How the exemption works

The Durbin Amendment, written into the Fed's Regulation II, caps debit and general-use prepaid interchange at $0.21 + 0.05% + a $0.01 fraud adjustment for issuers with $10 billion or more in assets, counted with affiliates. Smaller issuers earn whatever the network's table says. Government benefit cards are exempt at any bank, and so is reloadable prepaid that isn't sold as a gift card, charges no overdraft fees and gives one free in-network ATM withdrawal a month.

The gap is large. In the Fed's 2024 data, exempt issuers averaged $0.51 a transaction, about 1.21% of a $42 average purchase, while capped issuers averaged $0.23, about 0.47% of a $49 one. In 2023, exempt issuers handled 39% of debit and prepaid transactions and earned 59% of the $34 billion interchange pool. On Visa's posted table, a $40 online debit purchase earns an exempt bank about $0.81 and a capped one about $0.24.

Routing is the part people miss. Since July 1, 2023, every debit card, exempt or not, must let merchants route online purchases over at least two unaffiliated networks, usually including a cheaper PIN network. I haven't found public data on how much exempt online debit has moved since.

Why sponsor banks stay small

The Bancorp says it plainly in its annual report: it manages its balance sheet to stay under $10 billion to keep the exemption, and some of its fee-sharing agreements let partners terminate if it loses it. Pathward lists keeping the exemption among its risks. Chime's two banks, The Bancorp and Stride, are both under $10 billion, and Chime says most of its revenue has historically come from interchange.

The limit applies to the bank's assets, which means deposits, and program spend doesn't count. A bank near the line sheds deposits or sweeps them to other banks, and a growing fintech spreads its deposits across several small banks. Since the 2024 orders, though, a clean enforcement record and a working banking-as-a-service team count for about as much as the exemption when a fintech picks a bank. Evolve, Sutton, Piermont, Lineage, Thread and Blue Ridge were all exempt banks.

Interchange-funded products

• Neobanks. A free account paid for by merchants. Chime's debit interchange was 49% of its 2025 revenue, down from 55% in 2024, while early pay, savings and loans grew 48% to $240 million in the quarter to June 2026.
• Earned wage access. Providers waive the transfer fee when wages go to their own card, and earn interchange on what the worker spends instead. With state caps of a few dollars per advance, I think the card's interchange is becoming the steadier revenue line, and it's the payroll platform's plan.
• Payroll and payout cards. Low spend per card means fixed fees and minimums dominate; push-to-card income ($0.10 per Visa push payment received) and float matter more.

All three depend on the court cases, the Fed's proposal, the bank staying under $10 billion and how merchants route online debit.

Where the cap stands (October 2026)

• North Dakota. In Corner Post, a federal court vacated the fee standard on August 6, 2025, finding it included costs the statute doesn't allow. The ruling is stayed while the Fed appeals to the Eighth Circuit, which heard argument in May 2026. I found no decision as of October 6, 2026.
• Kentucky. In Linney's Pizza, a federal court upheld Regulation II in September 2025, and that case is on appeal to the Sixth Circuit. If the two circuits disagree, I'd expect the Supreme Court to take it up eventually.
• The Fed's 2023 proposal. It would cut the cap to 14.4¢ + 4 basis points + 1.3¢, about 28% less on a $50 purchase, and recalculate it every two years. It isn't final, and nine bank and credit union trade groups asked the Fed to withdraw it on December 8, 2025.

If the cap falls, the exempt premium per transaction grows, from about $0.28 to about $0.33 on 2024 averages by my arithmetic, and more mid-size banks stop sponsoring debit. If the cap is struck down with nothing in its place, the premium could shrink. I'd model both for any program whose plan runs past 2027.

Canada and Europe have no exemption to chase

Canada never had a Durbin cap, and debit doesn't need one: Interac, the domestic debit network, charges no interchange in stores. On Visa Canada's table, Visa Debit earns three cents in store while consumer prepaid earns 1.42-1.52%. So Canadian fintech "accounts" ship as prepaid cards; KOHO's is a prepaid Mastercard with customer funds at Peoples Trust, a trust company. KOHO raised C$130 million at a C$1.33 billion valuation in June 2026 and is seeking its own bank licence.

The EU caps consumer debit and prepaid at 0.2% and credit at 0.3% for every bank, and the UK kept the same caps, so European neobanks lean on subscriptions, foreign exchange, interest and commercial cards. Brazil caps debit at 0.5% and prepaid at 0.7%, and Mexico is consulting on caps.

Questions to ask a sponsor bank

1. How close are you to $10 billion in assets, and what happens to our split if you cross it?
2. Which orders or formal agreements have you had since 2024, and what do they require of partners?
3. What do you charge, as basis points, per-transaction fees and monthly minimums, and when do the minimums start?
4. What reserves or collateral do you hold against us, and when can you draw on them?
5. What do you need from our ledger every day, and in what format?