Fed disputes TCF's claims on card fees

The Federal Reserve Board of Governors has asked a federal judge to throw out a TCF Financial Corp. lawsuit seeking to stop the federal government from imposing new limits on debit-card fees charged to retailers.

Wayzata-based TCF filed court documents late last year claiming that a proposed cap on debit-card fees would cause "massive dislocation" for the bank, forcing it to offer debit cards to checking account customers at below cost.

Now the Fed governors are seeking to have TCF's lawsuit dismissed. In court documents filed Friday, they argued that TCF's claims of irreparable harm from the proposed fee cap are "highly speculative," and do not compare to the harm that retailers and consumers would face if the current debit-card fees remained in place.

When Congress debated the financial reform bill last summer, large retailers lobbied aggressively to have interchange fees limited. Retailers such as Wal-Mart argued that a reduction in the fees would enable them to cut prices for shoppers. The Dodd-Frank Act enacted in July required the Fed to set a cap on interchange fees charged to retailers.

The central bank proposed in December capping the fee at 12 cents per debit-card transaction, about 70 percent below the 44-cent average charge in 2009. TCF estimates it receives 47 cents per transaction, slightly above the national average.

The proposed rule, scheduled to take effect in July, touched off a lobbying battle between banks, who are against the limit, and large retailers. In testimony this week in Congress, both Fed Chairman Ben Bernanke and Federal Deposit Insurance Corp. Chairwoman Sheila Bair have raised concerns about the proposal. Many analysts think the fee cap will be amended, or at least delayed.

In court documents, TCF said the new cap would cost it $80 million a year in interchange fee revenue, and would reduce its return on equity from 12 percent to less than 8 percent. "TCF will become a business with a return on equity insufficient to attract new capital," the bank predicted.

The Fed's argument

The Fed governors are challenging each of TCF's arguments, arguing that TCF had failed to identify "any statute, regulation or contract establishing that it is legitimately entitled" to its current level of debit-card interchange fees.

The Fed argued that TCF could not claim a loss of private property, because the bank does not actually have a "protected property interest" in its debit-card income. Rather, these fees are determined by Visa and factors beyond TCF's control. TCF, the Fed argued, "has not shown that its contract with Visa entitles it to debit interchange fees at the current level."

In addition, the Fed governors argued that TCF's claim that it would suffer a decline in interchange income, and loss of stock market value, is "highly speculative." The bank, the Fed noted, still holds "certain competitive advantages" over smaller banks, including broader access to ATMs and branches.

To support its argument, the Fed governors noted that TCF's stock price has actually increased since the Fed announced its proposed rule on Dec. 16. Shares of the bank closed last Friday at $16.48 a share, up 23 percent from $13.45 on Dec. 16.

The Fed governors also defended Congress' decision to exempt banks with less than $10 billion in assets, arguing that smaller banks would be less able to absorb the lower interchange fees. By exempting smaller banks from the rule, Congress sought to ensure that smaller banks would keep issuing debit cards, the Fed governors said.

TCF has more at stake from the new fee limits than many other banks, because a large percentage of its revenue comes from checking account customers with debit cards. Debit-card interchange fees account for about 23 percent of TCF's non-interest income, compared with 7 percent at a typical Midwest bank, according to a recent report by investment firm Stifel Nicolaus.

TCF spokesman Jason Korstange declined to comment on the Fed Board's arguments, but said the bank would file a response by next Friday. A court hearing on the case is set for April 4.