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Debit-Card Swipe-Fee Cap Not Traditional, Lawyer Says

A planned cap on the debit-card swipe fees charged to merchants by the biggest U.S. banks is “discriminatory,” a lawyer for one of the affected banks told a U.S. appeals court panel. Photographer: Brand X Pictures/Getty Images
A planned cap on the debit-card swipe fees charged to merchants by the biggest U.S. banks is “discriminatory,” a lawyer for one of the affected banks told a U.S. appeals court panel. Photographer: Brand X Pictures/Getty Images

(Corrects government lawyer’s comment in sixth paragraph, description of Senate vote in 11th of story published June 17.)

June 17 (Bloomberg) -- A planned cap on the debit-card swipe fees charged to merchants by the biggest U.S. banks is “discriminatory,” a lawyer for one of the affected banks told a U.S. appeals court panel.

Timothy D. Kelly, a lawyer for TCF National Bank, told the St. Louis-based court yesterday that it should reverse a trial judge’s decision denying the bank’s bid to block the cap while the lender challenges its legality. The provision is scheduled to take effect July 21.

The limit on per-transaction charges is part of the Dodd-Frank financial overhaul. Banks with more than $10 billion in assets won’t be allowed to collect more than the cost of providing the service, making profit impossible, TCF claims.

“Below-cost rates and widespread exemptions are not traditional rate regulation,” Kelly told the three judge panel.

TCF, a Sioux Falls, South Dakota, unit of TCF Financial Corp., sued last year seeking to invalidate the measure, arguing it violates the U.S. Constitution’s promises that the government will not confiscate private property without just compensation and of equal protection under the law.

“Plaintiff has no statutory or contractual right to the continued receipt of any minimum level of interchange fees,” Justice Department lawyer Lindsey Powell told the judges, in defense of the regulation.

Visa Inc., the biggest electronic payments processor has “unmitigated discretion” to set fees and has reduced them in response to market and regulatory pressures, Powell said.

‘Reasonable Levels’

The as-yet-unannounced rate is to be fixed by the Federal Reserve. It’s part of a regulatory program intended “to restore to reasonable levels” fees charged to merchants and, through them, to consumers, attorneys for the government argued in appellate filings.

Federal Reserve Chairman Ben S. Bernanke is the lead defendant in the TCF suit, which also names Vice Chairman Janet Yellen, four Fed governors and Acting Comptroller of the Currency John Walsh.

The U.S. central bank in December said it was considering fixing the rate, required by law to be “reasonable and proportional” to the cost of providing the service, at 12 cents per swipe. The Fed hasn’t said when the rate will be announced, Susan Stawick, a spokeswoman, said June 13.

A U.S. Senate vote to delay the fee cap for six months failed as its proponents garnered just 54 of a needed 60 votes. The rate is scheduled to take effect on July 21.

The challenged provision added to Dodd-Frank, sponsored by U.S. Senator Richard Durbin, an Illinois Democrat, is known as the Durbin Amendment.

Swipe Fees

Swipe fees, or interchange, are set by Visa and MasterCard Inc., the second largest electronic-payment network, which collect the money and remit it to their member banks.

Interchange is the biggest component of the fees merchants pay when they accept Visa and MasterCard debit cards.

U.S. debit-card transactions have increased in volume from about 8 billion in 2000 to 38 billion in 2009, surpassing checks and credit cards as the most frequently used noncash means of payment, Bernanke said in a March 29 letter to Congress.

The fees exceeded $16 billion in 2009, according to the Federal Reserve.

TCF says it is the 47th-biggest U.S. bank and the 11th-biggest issuer of Visa debit cards, with about 1.5 million in customers’ hands. The new rate will cost it $80 million in the first year, the bank says.

‘Discriminatory Statute’

Kelly, responding to a question from U.S. Circuit Judge Michael Melloy, said Wayzata, Minnesota-based TCF Financial would need to receive 39.6 cents a swipe to ensure a 4 percent profit on the service.

Mandating a below-cost rate is an arbitrary decision, TCF’s lawyer said. “This is a discriminatory statute,” he said.

The regulation won’t apply to about 90 percent of U.S. banks.

Powell said TCF has no constitutionally protected right to “this particular revenue stream.” While the regulation says banks can only charge for the cost of providing the debit-card service, Powell said TCF was claiming costs for that service which are “arguably attributable” to the costs of maintaining a customer’s checking account.

She also said the lender wasn’t entitled to an order delaying the rule’s implementation because the bank hadn’t demonstrated to the appellate court, or to the lower court, that it was likely to prevail on its constitutional arguments.

April Ruling

U.S. District Judge Lawrence L. Piersol in Sioux Falls refused in April to delay enforcement of the law. In his ruling, Piersol said the bank didn’t meet the test, partly because “there is no regulation to review at this time.”

Unlike a public utility, a bank is under no compulsion to provide free debit-card service, Powell said yesterday. She also said differing economies of scale justified applying different rules to the biggest U.S. lenders.

TCF Financial Chairman William A. Cooper attended the April 4 hearing in Sioux Falls and yesterday’s oral arguments in St. Louis.

In a June 15 telephone interview, Cooper told Bloomberg News that the swipe-fee cap, if upheld, would force his bank and others to consider making up the revenue elsewhere.

“It would not be good for our middle-class customer, who you can anticipate is going to bear at least a part of this cost, and it would not be good for TCF,” he said.

The lower-court case is TCF National Bank v. Bernanke, 10-cv-04149, U.S. District Court, District of South Dakota (Sioux Falls). The appeal is TCF National Bank v. Bernanke, 11-1805, U.S. Court of Appeals for the Eighth Circuit (St. Louis).

To contact the reporter on this story: Andrew Harris at the U.S. Court of Appeals in St. Louis at

To contact the editor responsible for this story: Michael Hytha at

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