Fed acts to cut debit-card fees; TCF Financial drops 8%

(Bloomberg) -- The Federal Reserve Board proposed new rules to curb debit-card fees, offering alternative plans that are likely to aid retailers, and cut profit for U.S. lenders who reaped about $15 billion from such charges last year.

Wayzata-based TCF Financial, parent company of TCF Bank, has sued the Fed to block the new rules. TCF says it is the 12th largest issuer of Visa debit cards, and received debit card fee revenue from retailers "of just over $100 million from a swipe fee that amounts to a little less than $0.50 per average transaction of about $35."

Terms outlined by the Fed in documents posted on its website today include a plan with caps no higher than 12 cents per transaction. The fees currently average about 1 percent.

"Lowering of rates by the Fed would essentially translate to a pure profit loss for most banks," said John McDonald, an analyst with Sanford C. Bernstein & Co., in a note to clients Wednesday.

TCF's share price closed down 7.62 percent at $13.45, a decline of $1.11 per share Thursday. Meanwhile, a trio of company insiders has sold more than $2 million of their TCF stock in the past week, according to regulatory filings. CEO Bill Cooper sold the most, 100,000 shares worth $1.5 million.

"Setting a cap ensures that no issuer is able to receive an interchange fee at an unreasonably high level."

The central bank is crafting the caps on "swipe" fees, also called interchange fees, to comply with financial curbs that Congress passed in July.

Analysts have said the caps could erode profit for Visa Inc. and MasterCard Inc., the world's two biggest payment networks, and their stocks slid after the Fed posted the proposals. By contrast, the new rules may cut costs for retailers such as Wal-Mart Stores Inc. and Target Corp.

Visa fell $9.75, or 12.7 percent, to $67.19 in New York Stock Exchange composite trading. MasterCard dropped 10.3 percent to $223.49. Shares of the two retailers were up less than 1 percent.

"Visa is still reviewing the specific elements of the recommendations," said Will Valentine, a spokesman for the San Francisco-based company, in an e-mailed statement. "We cannot comment in detail on the proposed regulations until we have had a chance to fully consider their implications."

A TCF spokesman did not immediately reply to a request for comment.

Network Choice

"Setting a cap ensures that no issuer is able to receive an interchange fee at an unreasonably high level," said Janet Yellen, Fed vice chairman, in a memo outlining the proposals.

The Fed also proposed rules that would let merchants choose from at least two independent debit networks for routing transactions, potentially creating more competition for Visa and MasterCard.

To compensate for the lost profit, banks may eliminate rewards on debit cards and charge some customers for using them; increase fees on deposit accounts; and promote other products that aren't covered by the regulations -- such as charge cards that require consumers to pay their bills in full each month, McDonald said.

The debit caps were part of a measure pushed by U.S. Sen. Richard Durbin, D-Ill., whose new rules permit retailers to refuse credit cards for purchases of less than $10 and offer discounts based on the form of payment. It exempts lenders with assets of less than $10 billion and reloadable prepaid debit cards, which are used to distribute government benefits such as Social Security.

Credit Cards

The industry has escaped attempts to regulate interchange on credit cards, which average about 2 percent per transaction, saying the fees are needed to compensate for the risk of lending money. Debit fees don't have that problem because cash is immediately deducted from the consumer's checking account.

The so-called Dodd-Frank financial overhaul requires the Fed, which writes regulations on electronic payments, to complete the rules by April 21 and implement them by July 21. Thursday's vote opens a public comment period, after which the Fed board will meet to vote on the final rules.

(MPR's Bill Catlin contributed to this report)

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