A Minnesota based national bank has challenged the constitutionality of the law that would, for the first time, regulate debit card interchange.
TCF National Bank, headquartered in Wayzata, Minn., an $18 billion bank with branches in eight states, brought the suit. The bank claims to be the 10th largest Visa debit card issuer in the country, by sales volume, and thus has a direct stake in the regulation's impact.
"It is unprecedented for Congress, or any regulatory agency, to mandate a fee charged in the free market that not only denies a reasonable rate of return on investment but actually requires the rate to be lower than the incremental cost of providing the service," said William A. Cooper, Chairman/CEO of TCF Financial Corp., the bank's holding company. "Furthermore, the amendment affects only 1% of the nation's banks, giving thousands of unaffected banks an unfair competitive advantage."
"We believe these provisions violate our constitutional rights on three separate grounds: the regulations take our property without just compensation and without due process of law. And they also deny us equal protection under the law," Cooper said. "The statute makes no more sense than regulating the price of a Burger King hamburger solely to the costs of the meat and the bun. To stay in business, Burger King has to sell burgers at prices that cover more than those costs; it also has to cover costs such as paying an employee to make the hamburger and another employee to serve it, the cost of the building and maintenance, as well as the costs incurred to advertise and promote the product. Under the Durbin Amendment, TCF only gets to recover the cost of the bun."
Congress included the amendment, named for Sen. Richard Durbin (D-Ill.) its chief legislative sponsor, in the recent financial services reform law. It directs the Federal Reserve Board to set a rate of debit card interchange for banks of $10 billion or more in assets. The measure also instructed the Federal Reserve to limit the debit card interchange level to reflect only the costs related to authorizing, clearing and settling debit card transactions.
The Federal Reserve has started formulating the regulation, sending out surveys about debit program costs and revenues to banks, credit unions and credit card processors. Only three credit unions in the country, Navy Federal Credit Union, State Employees' Credit Union and Pentagon Federal Credit Union would be covered by the regulation.
In its filing, the bank argued that the regu
lation discriminates against it unlawfully both because it does not impact smaller debit card issuers in the same way and because it does not impact all players in the payment system equally.
"There is no legislative history for the amendment other than Senator Durbin's floor statements, which indicate the amendment was aimed at reducing fees charged by credit card issuers and debit network operators, such as Visa and MasterCard," the bank argued in its complaint. "But the amendment is entirely disconnected from that goal, regulating only debit card issuers with no restriction on others involved in credit and debit transactions, such as network operators and retailers. Any savings to those latter entities can be pocketed by them-there is no obligation under the amendment to pass cost savings on to consumers. Visa and MasterCard can continue to charge whatever they want to participants in their networks for their services. Only a small number of banks like TCF that issue debit cards are subject to this economic regulation."
TCF argued further that the bank was essentially caught in a bind, unable to start charging consumers for their debit card use to recoup the lost revenues, nor can the bank drop the debit card program that its customers demand.
The bank requested the court grant a temporary injunction against the law while its impact is studied.
Reaction to the banks complaint has ranged from the dismissive to cautiously supportive.
Durbin defended the amendment, suggesting that TCF doesn't really understand it.
"TCF's complaint not only fundamentally misunderstands the law regarding interchange fees, but it also ignores the facts," Durbin said. "The law in no way addresses the fees TCF, or any other bank, can charge, and it does not set interchange rates. Our language simply ensures that debit interchange fees charged to retailers by the card networks-not the banks-are 'reasonable and proportional' to the cost of processing transactions and provides competition in an area of the market where there's none."
"I look forward to this provision's day in court and am confident that our language will be found to be fair and constitutional," he added.
NAFCU's spokesman Patricia Briotta offered a reserved comment about the court action. "NAFCU opposed, and continues to oppose, the Durbin interchange-cap language due to its potential negative impact on credit unions' card operations," she said. "Over the next several days, NAFCU attorneys will continue to closely review and research the TCF Bank lawsuit challenge to the Durbin interchange amendment."
CUNA General Counsel Eric Richard said CUNA was also studying the bank's complaint but had already found things in it that it thought might be winning arguments.
"I think their argument addressing the confiscatory aspects of this may be the strongest," Richard said. "It's really unprecedented that a regulator charged with setting a price for something would be told to ignore parts of that price. That's not just bad law, it's bad economics, too."
Richard could not say whether CUNA would support the case, noting that there were parts of that bank's brief the association liked but others, such as the contention that it is unconstitutional for Congress to treat financial institutions differently because of size, that it would probably not support.