A lawsuit that TCF Financial Corp. filed Tuesday against the Federal Reserve has reinvigorated a fierce debate over whether banks should be allowed to charge retailers tens of billions of dollars a year for processing debit card transactions.
Retail industry groups have argued for years that the so-called interchange fees -- typically less than 2 percent of the purchase price on each transaction -- are too high and ultimately get passed down to consumers in the form of higher prices for everything from iPods to toothpaste.
This summer, as the popularity of banks sank to new lows, retailers seized on the chance to restrict the fees. They persuaded congressional leaders to insert a provision in the financial reform bill that allows the Federal Reserve to severely limit how much banks with assets of $10 billion or more can charge retailers each time a shopper swipes a debit card.
A number of large consumer groups cheered the provision, known as the Durbin amendment, and predicted that a typical family would save hundreds of dollars a year at the checkout register. Now, however, TCF Financial wants to kill the regulatory change before it goes into effect early next year.
The Wayzata-based regional bank, which collects about $100 million a year from interchange fees, is seeking a court order declaring the Durbin amendment unconstitutional and an injunction barring its enforcement.
The bank's chairman and chief executive officer, William Cooper, says the law unconstitutionally takes away TCF's property in the form of fees and violates the bank's right to equal protection by favoring smaller banks.
Unable to sue Congress, Cooper decided instead to sue his own regulator, Federal Reserve chairman Ben Bernanke and the Fed's board of governors.
Cooper, a longtime critic of government intervention in business, argues that current interchange fees are not too high, but instead are necessary to cover the costs of providing debit cards to customers.
He also strongly disagrees with the view, promulgated by retail industry groups, that stores will lower their prices if they pay less money to the banks when people use their debit cards.
"It is nothing but blatant lobbying by one industry [retailers] to take advantage of the political weakness of another," Cooper said. "Do you think Wal-Mart is going to give this money to charity? Why do you think they spent all this lobbying money to get it done?"
The National Retail Federation estimates that the average U.S. family paid $427 in interchange fees in 2008. The number was up from $378 in 2007, and has nearly tripled from the $159 paid in 2001, the year the National Retail Federation began tracking interchange. "Right now, consumers are footing the bill," said Doug Kantor of the Merchants Payments Coalition, a large group of retailers and retail trade associations. "To the extent that retailers pay less, consumers will pay less."
There is a lot at stake for TCF. The bank would be particularly hard-hit by limits on interchange fees because it has long made checking accounts and debit cards a focal point of its business.
TCF is the 47th-largest commercial bank in the United States, yet is the 12th-largest issuer of Visa debit cards.
Last year, TCF customers swiped their debit cards 200 million times, generating interchange revenue of $102 million.
Though analysts have long known that TCF collected lots of money from interchange fees, the full extent of the bank's dependence on the fees became clearer Tuesday.
In its lawsuit, the bank said the Durbin amendment could reduce the bank's return on equity, a key measure of bank profitability, from 12 percent to "less than 8 percent," jeopardizing the bank's ability to attract new capital.
TCF's interchange revenue would drop from $102 million to $20 million a year, the bank predicts in its lawsuit.
The Durbin amendment does not eliminate interchange fees. Instead, it allows the Federal Reserve to limit interchange fees to the bank's cost of authorizing, clearing and settling debit card transactions.
TCF argues that this amounts to just a "tiny fraction" of the true cost of offering the cards. It would prevent TCF and other banks from recovering a bevy of other costs, such as distributing cards to customers in branches or handling complaints.
The restriction on interchange fees is comparable to a federal law requiring that Burger King only charge enough for a hamburger to recover the cost of the bun, Cooper argued.
Robert Bliss, a finance professor at Wake Forest University, said TCF might have a difficult time arguing that the Durbin amendment amounts to an unconstitutional seizure of property.
After all, Congress has recently passed a series of laws, including health care changes, that limit companies' ability to make a profit.
However, the argument that the Fed would be discriminating against larger banks "sounds much more reasonable," Bliss said. "It takes some gumption for a bank to sue its regulator. ... It's like suing your neighborhood cop."
Chris Serres • 612-673-4308