Tuesday, June 21, 2011
In October 2010, TCF Bank, a subsidiary of TCF Financial Corp. of Wayzata, Minn., sued Federal Reserve Chairman Ben Bernanke and other Federal Reserve officials to stop implementation of the Federal Reserve's pending rule capping the amount of money banks with more than $10 billion in assets can charge for debit card transactions. The rule is required by the Durbin Amendment. Currently banks charge an average of 44 cents in interchange for each debit card transaction.
The proposed new rule, now under review after a public comment process, sets a 12 cent cap on debit interchange fees. TCF Bank's attempt to block the rule was denied by a U.S. District Court in April on grounds that the suit was premature because the rule was not in effect. The final rule is scheduled to be approved and take effect by July 21. The U.S. Senate in June failed to pass a bill that would have delayed the Durbin Amendment's implementation.
In the appellate court oral arguments Kelly maintained the Durbin Amendment violates the equal protection amendment of the U.S. Constitution because it takes private property without just compensation. "This is a discriminatory statute," he told the court. "It discriminates against large issuers versus small issuers." Judge Diane Murphy asked how the bank can seek relief from a rule that hasn't been created yet.
"You don't see rate regulation that excludes costs so our view is that on its face this statute is unconstitutional," Kelly answered. "You don't have to go to the actual final rule because there is no way the fed, in good conscience and in fidelity to the statute, can issue a rate that is anything less than cost. If you assume the fed is going to follow the statute with fidelity, it is never going to allow us to recover our costs. To the contrary, 20 of the 24 costs categories are excluded."
Kelly told the court he believes the final rule could add "a penny-and-a-half" for fraud prevention. "One part of our business shouldn't have to subsidize another," he said, claiming lost debit interchange fees will add up to losses of more than $80 million in the first year, which will have to be made up with additional fees elsewhere. He said the bank would need a rate of 39.6 cents to make a 4 percent profit on interchange fees after expenses.
Kelly also argued the banking industry is a regulated industry and eligible for the same protections as utility industries. "I don't [think] there's a case that approves destruction of a nonutility business through imposition of a below cost rate, nor do I think there will ever be such a case," he said.
Attorney Lindsey Powell, representing the Federal Reserve, countered Kelly. "This case presents a facial challenge to routine economic legislation that requires only transaction fees be reasonable and proportional to the cost of debit transaction," Powell said. "Congress sought to restore to balance to the market for debit services and protect consumers and small businesses from inordinate fees."
She added that TCF Bank "has no statutory or contractual right to the continued receipt of any minimum level of interchange fees. Rather, as the district court found, Visa has unmitigated discretion to set fees, and it can and has reduced fees in response to market and regulatory pressures."
Powell said banking and payment cards are among the most highly regulated industries in the country. Rates for interest and check processing have long been controlled by Congress. "Many costs that won't be recovered are associated with the checking account," she noted. "There is no constitutional right for the [TCF] to recover the entire cost of the checking account service through fees on just this one checking account service. There is no constitutional prohibition for recovery of checking frees, but there is no right to them."
Powell asserted Visa Inc. and MasterCard Worldwide have in the past engaged in anti-competitive practices and price fixing. "[TCF] has no right to benefit from anti-competitive behavior by Visa and MasterCard," she said. "That is not constitutionally protected." Powell noted that when debit interchange began the banks paid merchants' interchange fees, so TCF can't say now it can't change the system.
In addition, Powell emphasized the point made by Judge Murphy. "It is unclear which categories of costs the Federal Reserve Bank will take into account when promulgating its final regulations," she said. "Given the procedural posture of the court, the burden is on [TCF] to establish the likelihood of success on the merits, and so the uncertainty with respect to what the final regulations will be and what costs will alternately be allowed have to count against [TCF] under that standard."
She said the difference between utility regulation and banking regulation in this case is that utilities are legally compelled to provide a service, and there is no compulsion on banks to provide debit card service.
If the court were to accept Kelly's argument that the Durbin Amendment is unconstitutional "it would be a dramatic change in the way courts evaluate economic legislation to have to undertake a confiscatory rate analysis every time a legislature enacted something that affected a company's profits," she said. "It identifies no stopping point. Why not analyze minimum wage law the same way?
"The fact [that] only one rate is regulated weighs in favor of the constitutionality of the provision rather than against it. The plaintiff needs to be specific but we don't know what rate the fed will set, and we do not know what rate will allow [the company] a profit."
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