TCF Bank sues Federal Reserve over debit-card fees

TCF Financial, one of the biggest banks operating in Minnesota, is suing the Federal Reserve Bank in order to block impending limits on fees TCF and other banks charge retailers on debit-card transactions.

The Fed is following a legislative directive to set interchange, or "swipe" fees, that are "reasonable and proportional" to the cost of processing debit transactions. The Fed has yet to set those fees.

TCF argues the legislation directing the Fed to determine the fees is unfair and unconstitutional.

Last year, TCF had about $100 million in fee income from those cards, most of the money coming from merchants. TCF has said the average fee charged was about 1.3 percent.

But Bill Cooper, TCF's CEO, said he can't tell how much revenue could be lost with caps on fees charged merchants. "It remains to be seen, if indeed this law is found to be constitutional, what the final impact will be," Cooper said. "We don't know."

TCF claims it -- and its peers -- will be forced to provide debit card services below cost. TCF also complains the rules only apply to about 90 banks with $10 billion or more in assets. Thousands of smaller banks are not affected, Cooper said.

"TCF's complaint not only fundamentally misunderstands the law regarding interchange fees, but it also ignores the facts."

Visa Inc. and MasterCard Inc., the world's biggest electronic payment networks, determine interchange fees and pass the money to card-issuing banks. Interchange is the largest component of the fees U.S. merchants pay when they accept Visa and MasterCard debit cards.

The National Retail Federation said merchants pay more than $10 billion a year in interchange fees on debit card transactions.

Retailers say consumers end up absorbing the fees by paying higher prices.

But Cooper said retailers stand to profit hugely from a fee reduction, by keeping the savings instead of passing them on to consumers.

"These big retailers make a real killing on the backs of these 90 banks and their customers and their shareholders," he said. "This is not right."

Cooper said TCF thought about getting other banks and industry groups to join in a lawsuit, but he said it's too hard to reach a consensus.

"It's very difficult to get a uniformity of thought," he said. "The Bankers' Roundtable, the ABA (American Bankers Association), etc., etc.; they've all got different interests. And I've just got to tell you, people are afraid of the government today."

Cooper indicated that any loss in fee revenue from retailers would result in higher fees for bank customers.

"What you're really talking about, to a large degree, [is] retailers versus the banking consumer," he said. "In some fashion or another, the banking consumer is going to pay for this."

Following the filing of the suit, Sen. Dick Durban released a statement in response.

"TCF's complaint not only fundamentally misunderstands the law regarding interchange fees, but it also ignores the facts," Durbin said in the statement. "The law in no way addresses the fees TCF, or any other bank, can charge and it does not set interchange rates."

Durbin said their language 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's none. Durbin said in the statement he looks forward to this provision's day in court and he is confident that their language will be found to be fair and Constitutional.

The Durbin amendment was passed by the Senate 64-33 in May of this year during the Senate's consideration of the Wall Street reform bill.

(This report contains material from Bloomberg News Service.)

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