Debit Card Fee Cap Should Be Shelved During Suit, Bank Argues

From: Bloomberg

A cap on debit-card swipe fees collected by the biggest U.S. banks should be delayed past a July deadline until a challenge to the law is decided, TCF National Bank argued to a federal appeals court.

The limit on the per-transaction charge is part of the Dodd-Frank financial overhaul. Banks with more than $10 billion in assets won’t be allowed to collect more than the cost of providing the service, making profit impossible, TCF said.

“TCF will no longer be able to maintain its financial integrity,” the bank, a unit of Wayzata, Minnesota-based TCF Financial Corp. (TCB), said in court papers.

U.S. District Judge Lawrence L. Piersol in Sioux Falls, South Dakota, refused in April to delay enforcement of the law. The U.S. Court of Appeals in St. Louis will hear oral arguments today on the bank’s appeal of that ruling.

A Federal Reserve-set cap will apply to banks with assets of more than $10 billion. TCF, a Sioux Falls-based bank with $18 billion in assets, sued the government saying the law is unconstitutional because it’s “confiscatory” and because it will give the 90 percent of U.S. banks below the $10 billion threshold a competitive advantage.

TCF bank is backed by banking associations. It’s opposed by retailers that pay the fees.

“The merchants have the better argument,” Washington lawyer James C. Miller III, director of the Office of Management and Budget under Ronald Reagan, said in a June 14 phone interview. “This is a situation where the market has failed.”

Rising Costs

“The prices are going up while the cost of making the transactions are going down,” Miller said, explaining his support for the Durbin Amendment after years of opposing much government regulation. “The costs are much smaller than what they are charging.”

The Federal Reserve hasn’t said when the rate will be announced, Susan Stawick, a spokeswoman, said June 13. The central bank in December said it was considering a limit of 12 cents a transaction.

The U.S. Senate on June 8 voted 54-45 against delaying the fee cap for six months. The enforcement deadline is July 21.

The challenged provision added to Dodd-Frank was sponsored by U.S. Senator Richard Durbin, an Illinois Democrat, and known as the Durbin Amendment.

Swipe fees, or interchange, are set by Visa Inc. (V) and MasterCard Inc. (MA), the biggest electronic-payment networks, which collect the money and remit it to their member banks.

Merchant Fees

Interchange is the biggest component of the fees merchants pay when they accept Visa and MasterCard debit cards.

U.S. debit-card transactions have increased in volume from about 8 billion in 2000 to 38 billion in 2009, Federal Reserve Chairman Ben S. Bernanke said in a March 29 letter to Congress, surpassing checks and credit cards as the most frequently used noncash means of payment.

The fees exceeded $16 billion in 2009, according to the Federal Reserve.

Under the Durbin Amendment, a fee must be “reasonable and proportional” to the card-issuer’s cost of electronically processing the transaction. Costs “not specific to a particular electronic debit transaction” can’t be considered.

“This is the limitation that makes the rate cuts confiscatory,” the bank argued in court papers. The Durbin Amendment allows banks to recover “only a fraction” of the actual cost “and bars earning a profit on debit service.”

TCF says it is the47th-biggest U.S. bank and the 11th- biggest issuer of Visa debit cards, with about 1.5 million in customers’ hands.

Swipes, Revenue

“Last year, TCF customers ‘swiped’ their debit cards over 200 million times,” the bank’s brief said. “From that activity, TCF received debit card interchange revenue of just over $100 million.”

The new rate will cost it $80 million in the first year, the bank says.

While the issue on appeal is whether to delay the rule during the case, the court will consider which side is ultimately likely to win, a test of whether to grant a preliminary injunction.

In his April ruling, Piersol said the bank didn’t meet the test, partly because “there is no regulation to review at this time.”

The bank claims that whatever the final rate is, it inevitably will result in unequal application of the law and a regulatory taking of its property — its swipe fees — in violation of the Constitution.

Expectation Only

The government counters that the bank has “no more than a unilateral expectation” of future revenue and that isn’t protected by the Constitution.

The cap is part of a regulatory program intended “to restore to reasonable levels” fees charged to merchants and, through them, to consumers, wrote lawyers for the officials who were sued. The officials are the Fed’s Bernanke, Vice Chairman Janet Yellen, four Fed governors and Acting Comptroller of the Currency John Walsh.

Visa and MasterCard, the dominant providers of credit and debit cards, charge higher swipe fees than the service costs, he said.

“I am hopeful that in two or three years there will be no need for the rule,” said Miller, a senior adviser at the Washington law firm Husch Blackwell LLP who isn’t involved in the TCF case. “You will see prices fall, and you will see real competition between these providers.”

The lower-court case is TCF National Bank v. Bernanke, 10- cv-04149, U.S. District Court, District of South Dakota (Sioux Falls). The appeal is TCF National Bank v. Bernanke, 11-1805, U.S. Court of Appeals for the Eighth Circuit (St. Louis).

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