Correction to This Article
This article misidentified the federal agency that settled an investigation into Visa and MasterCard's credit card contracts with merchants and filed an antitrust suit against American Express. It was the Justice Department, not the Federal Trade Commission.

Bank sues government over debit card amendment

By Ylan Q. Mui
Washington Post Staff Writer
Tuesday, October 12, 2010; 11:59 PM

A Minnesota bank filed a lawsuit Tuesday claiming that a law overseeing debit card swipe fees is unconstitutional and requested that it be overturned.

The legislation, which Congress passed this summer as part of the wide-reaching financial overhaul package, directs the Federal Reserve to study the fees that banks receive from retailers each time a shopper uses a debit card to make sure they are "reasonable and proportional." But in the first legal challenge to the law, TCF National Bank says that the language does not allow the Fed to consider all the costs of providing and maintaining consumer debit cards. It also argues that the legislation is unfair because it applies only to banks with $10 billion or more in assets.

"TCF is going to take an aggressive position on it," chief executive William A. Cooper said. "We believe we're going to be successful."

The swipe fees typically average about 2 percent of the price of a purchase and have long been a point of contention among retailers, banks and card processors, including MasterCard and Visa, that set the rates. The swipe fees apply to debit and credit cards, but the law covers only debit cards. Retailers organized a massive campaign to push for the legislation, which was sponsored by Sen. Richard J. Durbin (D-Ill.), arguing that reducing swipe fees would allow them to lower prices for strapped shoppers.

"There's no doubt consumers will see benefit from this," said Doug Kantor, counsel to the Merchants Payments Coalition, a trade group. "There is zero legal merit to their suit."

The legislation does not require retailers to pass on savings from lower swipe fees to their customers, though Kantor said intense price competition in the industry makes that inevitable. But Cooper said the legislation was designed to help retailers and hurt banks.

"It is nothing but blatant lobbying by one industry to take advantage of the political weakness of another in an economic distress time," he said.

Swipe fees, which are also referred to as interchange, have become an increasingly important source of revenue for banks as strict new regulations restrict other fees and charges, such as overdraft and credit card interest rates. In its lawsuit, TCF said its customers used their debit cards 200 million times last year, generating about $100 million in fees.

The bank receives 1.35 percent of the price of each transaction from merchants, the suit said. Though the Fed has yet to issue its regulations, TCF estimated its rate would drop to 0.26 percent of transactions. A Fed spokeswoman declined to comment on the case.

Like other banks, TCF said that it would have to raise other fees to make up for any lost revenue. That could mean an end to popular free-checking programs.

"The banking consumer is going to pay for this," Cooper said.

TCF said it considered asking other banks to join in the suit but opted against it. Many of the banks affected by the swipe fee legislation also issue credit cards, which are not covered by the law. TCF offers only debit cards.

Still, the American Bankers Association, a trade group, issued a statement Tuesday in response to the lawsuit, calling the legislation "poorly thought out."

"There is no justification for the government providing a direct subsidy to large retailers by legislating a price for a service," ABA chief executive Edward L. Yingling said.

In a statement Tuesday, Durbin said his legislation did not seek to set the rate of swipe fees, only to ensure that they are fair.

"Congress approved this language by a wide bipartisan margin," Durbin said. "I look forward to this provision's day in court and am confident that our language will be found to be fair and constitutional."

Meanwhile, the Federal Trade Commission is challenging the contracts that card processors have with merchants to accept credit cards. Last week, it settled with Visa and MasterCard to allow merchants to give customers discounts for using cards with lower swipe fees. American Express refused to settle the investigation, and the FTC has filed an antitrust suit against the company.

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