Tuesday, July 5, 2011
The Durbin Amendment to the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 directs the Federal Reserve to cap debit card interchange fees at a rate "reasonable and proportional to the actual costs" of card issuers. The cap is applied only to bank issuers with more than $10 billion in assets. The initial rule proposed by the Federal Reserve excluded many of the issuers' costs of debit cards from the "reasonable and proportional" cost calculations.
The final rule, delivered by the feds in June 2011, proposes a 21-cent transaction cap with an adjustment added to pay for fraud loss and prevention. The Federal Reserve estimates the interchange fee from the average $38 debit card transaction will amount to approximately 24 cents – about half the current fee. The new rule is scheduled to take effect in October, 2011.
TCF attorney Timothy Kelly argued to the appellate court that excluding some bank debit card costs from the Federal Reserve's calculation of "reasonable and proportional to the actual costs" amounts to rate regulation. Rate regulation that excludes costs is unconstitutional, Kelly argued in TCF National Bank v. Bernanke, 11-1805, U.S. Court of Appeals for the Eighth Circuit [St. Louis].
In its opinion denying TCF's request for preliminary injunction, the Court of Appeals wrote, "The Durbin Amendment only restricts how much certain financial institutions issuing a debit card may charge for processing a transaction; it does not restrict how much those institutions may charge their customers for the privilege of using their debit-card services.
"Since TCF is free under the Durbin Amendment to assess fees on its customers to offset any losses under the Durbin Amendment, we are skeptical that the Durbin Amendment has even created a sufficient price control on TCF's debit card business so as to trigger a confiscatory-rate analysis or that the law could, in fact, produce a confiscatory rate."
The appellate court rejected the TCF argument that market pressures will give an unfair advantage to smaller, exempted banks that do not have a debit card interchange fee cap. "By TCF's own admission," the court wrote, "Visa is currently bound to offer all financial institutions the same interchange rate, and as such, the record is not clear that smaller banks will have a competitive advantage." The court noted there is no law prohibiting TCF from recouping losses from the debit card cap with new or increased customer fees. It concluded there was a rational basis for the Durbin Amendment and TCF was not likely to prevail on its due process claim.
TCF additionally argued the lower court erred in its analysis of its equal protection claim, but the court found this claim "meritless." 
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