TCF Bank's fight with the Federal Reserve Board over debit card fees reaches a critical juncture Thursday. The bank will ask a panel of judges at the US 8th Circuit Court of Appeals in St. Louis to block a law requiring banks to slash the fees they charge merchants whenever a customer makes a debit card purchase.
The steep cut would cost TCF about $80 million a year. And overall, it would take billions of dollars in fee income from the banking industry.
Merchants have long complained the fees they pay when accepting debit cards are far too high, generally between one and two percent of a transaction. Banks have argued the fees are justified, given the increased sales and other benefits debit cards bring retailers.
“It's going to be painful. It's going to affect their bottom line.”Jamie Peters, Morningstar banking analyst
But Congress sided with merchants last year and directed the Federal Reserve to order a cut in the debit card fees retailers pay. Banks failed last week to convince the U.S. Senate to delay the fee rollback.
Now, TCF's lawsuit, which some observers initially viewed as a Hail Mary pass, appears to be the banking industry's best shot. "Now that the Senate failed to act, and it's unlikely the House will act, attention really focuses on how the court of appeals will interpret TCF's contentions in this case," said Bert Ely, a banking industry consultant.
Ely said banks are resigning themselves to a big cut in debit cards fees, at least while the courtroom battle over the fee cut plays out. He said there might be some last-minute twists and turns, but at the moment it looks like the Fed will issue a final rule and the cap on the fees is expected to take effect next month.
The fees have averaged 44 cents per transaction, but the Fed has proposed a 12-cent cap. It's been estimated the cap could cost banks $10 billion to $20 billion a year in lost revenue. Asked this week for its assessment of how much the fee cut would hurt banks, the American Bankers Association would only say it would be in the billions of dollars. TCF has led the banking industry's court fight against fee cuts. TCF sued the Fed in federal court in South Dakota. TCF officials say the proposed Fed rule places unconstitutional limits on banks' ability to recover their costs and doesn't treat all banks the same. It would only apply to banks with assets of $10 billion or more.
The bank asked the South Dakota court to suspend the fee cut until TCF's lawsuit is resolved. But the judge denied that request, saying TCF seems unlikely to win on its claim the fee cut is clearly unconstitutional. That's the ruling TCF is appealing in St. Louis. "What we're looking for is to delay enactment of the amendment until such time as the constitutionality is decided," said Jason Korstange, a TCF spokesman.
TCF expects the appeals court will rule by early next month, well before the Fed is expected to finalize its rules for debit card fees on July 21. If TCF loses this round, Korstange said the bank could pursue further appeals.
DEPENDENT ON FEES
Debit cards are now the country's favorite form of payment after cash, and other banks stand to lose much more revenue from the debit card fee cut than TCF does. US Bank has said it could lose about $400 million a year, before efforts to reduce the loss.
But Morningstar banking analyst Jamie Peters said TCF is more dependent on debit card fees than most banks are.
"Their percentage of income that comes from things like debit card interchange is a lot higher," Peters said. "So TCF, as far as the size of the hit they're going to take, it's a much bigger deal to TCF than most banks."
Peters estimates debit fees account for about eight percent of TCF's revenue.
"It's going to be painful," she said."It's going to affect their bottom line."
Retailers argue competition will force them to pass on fee savings to consumers. Banks contend retailers will just pocket the money.
Peters said banks will try hard to find other ways to generate revenue from debit cards such as an increase in annual fees or a per-transaction fee being added to an account. "You may see people losing the option of having debit cards and going back to checks. You could see a lot of different scenarios," she said.
Peters said banks may decide some customers aren't worth keeping, not if there's a big drop in the fee income derived from their debit card purchases. She said banks could start pushing credit cards more since they are not subject to the pending fee cap.