Federal Reserve Claims Visa, Not The Free Market, Controls Debit Fees
PIERRE, S.D.-Lawyers for the Federal Reserve told a federal appeals court that expectations by Minnesota's TCF Bank for a continued revenue stream from debit transactions are not dependent on the free market but on card giant Visa, which paid the bank $100 million in debit fees last year.
"Nothing in (TCF's) contract with Visa guarantees any minimum interchange fees or even limits the circumstances in which Visa can reduce the fee schedule," said the Fed's lawyers, in asking the U.S. Court of Appeals for the Eighth Circuit to uphold a lower court ruling clearing a final rule by the Fed on debit fees.
As the district court found, "Visa retains unmitigated discretion to set debit interchange fees and there is no statutory or contractual provision guaranteeing TCF a certain level of interchange income," the Fed said, noting that Visa faces billions of potential legal costs in pending suits.
The Fed's argument alludes to numerous pending antitrust cases against Visa and MasterCard, including a December settlement with the U.S. Justice Department that is expected to result in a large financial settlement rivaling the two card companies' $3-billion settlement of 2007 in the merchants' antitrust case. Visa has amassed a $3-billion litigation reserve to pay potential settlements.
The Fed also rejected arguments by the $18-billion bank likening debit card usage to that of a public utility, asserting banks should not have the same rights as public utilities in rate-setting by the government because debit cards are not an essential service, like electric power generation or water supply. In fact, said the Fed, there are ample options for consumers if one bank or credit union decides to exit the debit card market if it feels the return is inadequate.
In a brief supporting the Minnesota bank, CUNA, NAFCU and the banking lobby groups argued that the ubiquity of debit cards means they should be regulated with the same deference of a public utility, with a minimum guaranteed rate of return.
The Fed lawyers assert that the debit provisions of last year's Wall Street reform bill carves out most credit unions and banks from the price caps in an explicit effort to protect them. "The small-bank (and credit union) exemption is rationally related to Congress's legitimate interests in safeguarding small banks and ensuring the continued availability of debit cards to consumers, said the Fed's lawyers. They noted that several other provisions of the Dodd-Frank Act and other bills provide exemptions for banks and credit unions under the $10-billion debit threshold.
In their own filings with the courts, the credit unions and banks acknowledge the intent of the carve-out but insist it will have an unintended effect by forcing them to accept the lower fees in order to continue to compete in the market.
The appeals court has set a hearing on the bank's request to block the Fed action next month.