Lawyers for Federal Reserve Chairman Ben S. Bernanke and a regional savings and loan association are squaring off over debit-card fees in a South Dakota courtroom 1,075 miles from the debate in Congress on the same issue.
U.S. District Judge Lawrence L. Piersol in Sioux Falls is hearing arguments today on coming Federal Reserve regulations to limit “swipe fees,” the money merchants must pass along to banks in exchange for being able to accept cards as payment. TCF National Bank, a Sioux Falls-based unit of TCF Financial Corp., sued the board seeking a bar to rules it said will cause them to lose money on debit-card services.
“The purpose of sound regulation is to introduce or advance competition, not to destroy it,” TCF’s lawyers wrote in a court filing, alleging the measure is unconstitutional. The new rules could mean a $75 million to $90 million drop in swipe-fee revenue, TCF Financial Vice Chairman Gregory Pulles said in a separate filing.
The government is asking Piersol to throw out the case. Its lawyers say the suit is meritless because Congress has ample authority to regulate banks and premature because the rules under attack haven’t been enacted.
The bank “merely has a unilateral expectation of receipt of” swipe fees, Justice Department lawyers said in court papers.
Even assuming TCF had a viable property right in future fees, its claims are premature because the court can’t yet know if TCF will receive a “constitutionally permissible” rate of return, the government said.
U.S. debit-card transactions climbed from about 8 billion in 2000 to 38 billion in 2009, Bernanke said in a March 29 letter to a congressional committee. The cards have surpassed checks and credit cards as the most frequently used noncash means of payment, he said.
Visa Inc., the world’s biggest electronic-payment network, and MasterCard Inc., the second largest, set the fees, also called interchange, and then pass the money to the card-issuing banks. Interchange is the biggest component of the fees U.S. merchants pay when they accept Visa and MasterCard debit cards. Debit-card interchange exceeded $16 billion in 2009, according to the Fed.
The debit caps are the product of legislation regulating how much merchants are charged to accept debit cards. The fees must be “reasonable and proportional” to the cost incurred by the bank, under the law.
The provision, sponsored by U.S. Senator Richard Durbin of Illinois, a Democrat, was added to last year’s Dodd-Frank financial regulation overhaul bill and is known as the Durbin Amendment.
The amendment excludes banks with less than $10 billion in assets, or about 99 percent of all U.S. lenders.
TCF’s bid for court-ordered relief comes as Congress debates whether to block the Fed’s rulemaking. While the swipe fee cap is set to begin July 21, the Federal Reserve Board of Governors is still deciding what that cap should be.
Bernanke told Congress the board is examining more than 11,000 comments it received on the measure and will miss an April 21 deadline to formulate fee standards.
The Fed in December proposed capping debit interchange fees at 12 cents a transaction, compared with the current formula that averages 1.14 percent of the purchase price, or 44 cents.
TCF Financial, based in Wayzata, Minnesota, said in its lawsuit, filed Oct. 12, that the provision would put the biggest U.S. banks at a competitive disadvantage by forcing them to provide debit-card services below cost while exempting smaller institutions.
“There is no conceivable scenario under which the board could issue fee standards that would allow any covered bank to recover all its actual costs of debit service from merchants, to say nothing of a positive return on capital,” TCF’s lawyers said in a court filing.
TCF Financial revenue last year topped $1.2 billion, according to its year-end filing with U.S. securities regulators. It claims more than $18 billion in assets, which its lawyers said makes it “hardly a ‘big’ bank” when compared with others in its regulatory class.
Bank of America Corp., the largest U.S. bank, had assets of almost $2.3 trillion at the end of 2010, according to Bloomberg data. JPMorgan Chase & Co. had $2.1 trillion; Citigroup Inc., $1.9 trillion.
With operations in Minnesota, South Dakota, Illinois, Michigan and four other states, TCF was the 22nd-biggest U.S. debit-card issuer in 2009, with $7.31 billion in transactions processed on 2.27 million debit cards, according to the Nilson Report, an industry newsletter in Carpinteria, California.
Merchant groups are backing the Durbin Amendment in the case and joined the U.S. in assailing TCF’s claims.
“These fees have reached levels that cannot be justified by market forces,” the Merchants Payments Coalition said in a brief, describing itself as a group of 20 national and 80 state trade association members.
Interchange fees tripled to $48 billion in 2009, from $16 billion 2001, according to the coalition filing. TCF, it said, hasn’t met its burden of showing “confiscatory ratemaking.”
Standing with TCF is a group of organizations including the American Bankers Association, Consumer Bankers Association and the Mid-Size Bank Coalition of America.
“With virtually unprecedented unanimity, amici stand in opposition to the Federal Reserve Board’s imposition of unreasonable and drastic price controls on debit-card interchange fees,” their lawyers said in a friend-of-the-court, or amicus curiae, brief.
Noting the board’s consideration of a 12-cent per transaction swipe fee cap, the group said such a rate would slash interchange revenue by as much as 80 percent, “resulting in a staggering drop of approximately $12 billion in revenues per year for banks and credit unions.”
If that happens, TCF’s Pulles told the court, his bank will have to reevaluate its 442-branch network and contemplate eliminating thousands of jobs.
The case is TCF National Bank v. Bernanke, 10-cv-04149, U.S. District Court, District of South Dakota (Sioux Falls).
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