Federal Reserve Sued by Minnesota Bank on Debit Caps

TCF Financial Corp., a Minnesota bank, sued the Federal Reserve to block a U.S. law that limits the fees charged to retailers on debit-card transactions.

The provision of the Dodd-Frank Act known as the Durbin Amendment puts the biggest U.S. banks at a competitive disadvantage by forcing them to provide debit-card services below cost and by exempting smaller banks, Wayzata-based TCF said in a lawsuit filed today in federal court in Sioux Falls, South Dakota.

The law is akin to Congress telling Burger King “you can only charge for the hamburger and the bun,” TCF Chief Executive Officer William A. Cooper said in a telephone interview. “Ignore all the costs of the overhead and the cooks and the advertising.”

The bank claims that the law unconstitutionally takes away its property in the form of legitimate fees and violates its right to equal protection by favoring smaller banks. TCF seeks a court order declaring the measure unconstitutional and an injunction barring its enforcement.

The provision, pushed by U.S. Senator Richard Durbin, directs the Fed to set interchange, or “swipe” fees, that are “reasonable and proportional” to the cost of processing debit transactions. It excludes banks with assets of less than $10 billion, or about 99 percent of all U.S. lenders.

‘Fundamentally Misunderstands’

TCF “fundamentally misunderstands” the law, Durbin, a Democrat and the senior senator from Illinois, said in a statement responding to the lawsuit. The law doesn’t set interchange rates, he said.

“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,” Durbin said.

Visa Inc. and MasterCard Inc., the world’s biggest electronic-payment networks, set 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 fees last year totaled $19.7 billion and averaged 1.6 percent of each sale, according to the Nilson Report, an industry newsletter.

The case is TCF National Bank v. Bernanke, 10-cv-04149, U.S. District Court for South Dakota (Sioux Falls).

To contact the reporters on this story: Andrew M. Harris in Chicago at aharris16@bloomberg.net; Peter Eichenbaum in New York at peichenbaum@bloomberg.net.

To contact the editors responsible for this story: David E. Rovella at drovella@bloomberg.net; David Scheer at dscheer@bloomberg.net.

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