Other debit card issuers are likely to pledge support for TCF Financial Corp.’s Oct. 12 lawsuit filed against the Federal Reserve Board that challenges the constitutionality of the provision within the Dodd-Frank Act requiring the Fed to set debit interchange rates, analysts say.
“Issuers are talking to their lawyers to see if they have any legal traction and, if so, they may get behind it,” Rodman K. Reef, chairman and CEO of the Larchmont, N.Y.-based card consultancy Reef Karson & Co., tells PaymentsSource.
First Citizens Bank, a 400-branch debit-issuing institution based in Roanoke, Va., views the lawsuit as “hugely positive,” William Shaw, group vice president, tells PaymentsSource. “It makes sense that (the provision) poses a constitutional question because it waives the effect for certain banks and not others and interferes with our lines of business,” he says.
Issuers may be “heartened” by TCF’s lawsuit, but “most issuers are still moving forward with their own scenarios and analyses for how they are going to cope under new debit interchange rates,” says Beth Robertson, director of payments research at Javelin Strategy & Research.
Oliver I. Ireland, a payments industry regulation expert and a partner with Washington, D.C.-based Morrison & Foerster LLP, says other issuers likely will file friend-of-the-court briefs supporting the suit.
“There are constitutional issues here, and you have to delve pretty deeply into them to assess which way it’s going to go,” Ireland says. “But this is a pretty dramatic piece of legislation that has a very major effect on a lot of institutions, and the idea that someone has sued is not surprising to me.”
TCF quietly began making plans to file a lawsuit contesting the Durbin Amendment the moment Congress voted to pass the bill, the bank’s CEO William Cooper tells PaymentsSource.
The bank moved as quickly as possible, Cooper says, noting that the Oct. 12 filing date also happens to be the day the Fed required TCF to return a survey providing information about its debit card services and costs.
TCF hopes its lawsuit may block implementation of the new debit rules altogether, but at the least it may slow the process, Cooper says.
The Fed has not said when it will issue proposed debit-interchange regulations. Language in the financial reform act requires the Fed to set new debit-interchange rates on April 21, and those rules would take effect July 21.
TCF attorney Tim Kelly, of the Minneapolis law firm Kelly & Berens, says the court may issue a preliminary injunction that would at least temporarily halt implementation of the law and interrupt the existing timetable.
“It is possible or even likely that the Fed will have to go back to Congress and say they need more time to survey and analyze the (debit) market,” Cooper says.
Sen. Richard Durbin, D-Ill., who wrote the amendment within the Dodd-Frank Act pertaining to debit-interchange regulation, said in a statement today that TCF’s complaint “not only fundamentally misunderstands the law regarding interchange fees, but it also ignores the facts.” Durbin said he is confident the courts will find the interchange provision “fair and constitutional.”
Durbin contended that the law “in no way addresses the fees TCF, or any other bank, can charge. The legislation does not set interchange rates” and instead “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 is none,” he said.
Cooper says debit interchange is an essential element of providing checking-account services to customers. He declined to say what exact portion of the issuer’s retail checking account revenues debit interchange represents, but said it is “a large part.”
The average TCF checking-account customer initiates about 20 debit transactions per month and writes about six checks per month, Cooper says.
The majority of TCF’s debit transactions are signature-based, Cooper says. Most regions in which it operates, with the exception of the Chicago area, have low levels of PIN-debit network coverage, he says.
“Debit is not a profitable product in and of itself; it is just part of a delivery system. ... I can’t offer a checking account without debit,” Cooper says.
Merchants “paid millions to lobby Congress at a time when banks were unpopular to get an unfair advantage with this unconstitutional law,” Cooper says, noting there is no indication merchants plan to pass their savings from potentially lower debit interchange rates on to consumers.
“Debit is profitable to both merchants and banks; if it weren’t profitable for merchants, they wouldn’t accept it,” Cooper says. “(The Durbin Amendment) is the result of merchants like Wal-Mart that are used to crushing everybody ... trying to get Congress to regulate debit interchange for them.”
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