Wayzata-based TCF National Bank has ratcheted up its constitutional challenge to limits on controversial credit card fees charged to merchants that were part of the Dodd-Frank financial reform legislation passed by Congress last year.
The bank — a subsidiary of TCF Financial Corp. (NYSE: TCB) — filed legal briefs in South Dakota federal court responding to a Department of Justice motion seeking to dismiss TCF’s lawsuit.
The original lawsuit, filed last fall, challenges the constitutionality of the Durbin Amendment, named after its sponsor, Sen. Richard Durbin, D-Illinois.
TCF’s statement, issued late Friday, said the government “did not contest the price-fixing aspect of the Durbin Amendment which will compel debit interchange fees to be set below actual cost.”
“Instead, the [Justice Department] contends that the constitutional protections prohibiting arbitrary price controls exist only to protect utilities and that other American businesses have no constitutional protection against expropriation by the government through below-cost price-fixing,” the company statement said.
At the heart of the controversy are billions of dollars in interchange fees set by the credit card networks such as Visa and Mastercard that are charged to merchants by the banks issuing the cards.
In a statement issued last fall after TCF Financial initially filed its suit challenging the provisions, Durbin said: “TCF’s complaint not only fundamentally misunderstands the law regarding interchange fees, but it also ignores the facts. The law in no way addresses the fees TCF, or any other bank, can charge and it does not set interchange rates. Our 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.”
The stakes are high for the industry.
According to Durbin’s office, “nearly $50 billion in interchange fees were charged by credit and debit card networks in 2008 – coming out of the bottom lines of small businesses, charities and government balance sheets. Of these fees, 80 percent went to just ten large banks.”
The Durbin amendment passed the Senate 64-33 last May as part of the Wall Street reform act. The amendment requires the Federal Reserve to determine if the current interchange fee structure is both “reasonable and proportional” to the real cost of processing a debit card transaction, Durbin’s office said. The law also prevents card networks from requiring that their debit cards be transacted exclusively on one debit network and allows small businesses to offer discounts to consumers when they use cash, checks or debit cards.
At the same time as the TCF suit last fall the Justice Department filed an antitrust lawsuit against American Express over its merchant agreement practices while reaching a settlement with Visa and MasterCard. The settlement required the two companies to allow merchants to offer discounts, incentives, and information to consumers to encourage the use of less-costly payment methods.
TCF has 442 banking offices in Minnesota, Illinois, Michigan, Colorado, Wisconsin, Indiana, Arizona and South Dakota and claims it is “now the 11th largest U.S. Visa Classic debit card issuer ranked by sales volume.”
TCF’s motion for a preliminary injunction will be heard April 4 in Sioux Falls, S.D.