U.S. District Judge Lawrence L. Piersol delivered the first ruling on TCF Bank’s legal challenge to the Durbin Amendment, leaving both the bank and the Federal Reserve dissatisfied.
As a refresher, the Fed proposed limiting debit “swipe” fees to 12 cents per transaction, but exempted small community banks and credit unions. The exemption was meant to address the unique challenges of small banks, which often face higher fraud prevention costs and pass more of their profits on to their customers. Credit unions, in particular, are not-for-profit institutions that tend to translate interchange fee revenue into greater benefits for their members.
TCF argued that the Fed’s interchange fee regulation proposal was unconstitutional, as it gave an unfair advantage to small banks in violation of the Constitution’s Equal Protection clause. “The purpose of sound regulation is to introduce or advance competition, not to destroy it,” said TCF lawyer Timothy Kelly.
But the Federal Reserve countered that interchange fee regulation was well within its powers. “[Interchange revenue] is not a fundamental right,” said Justice Department lawyer Bradley Cohen. He further argued that TCF’s lost revenue was purely theoretical, and the regulations haven’t been finalised yet.
Not without merit, but not enough for a stay
Judge Piersol refused to delay the law’s implementation while the lawsuit makes its way through the courts, a setback for TCF. However, he also refused to outright dismiss the case, dashing the Fed’s hopes to avoid another day in court.
While Judge Piersol refused to block the law’s implementation, he noted his concern that the small bank exemption violated the Fourteenth Amendment Equal Protection clause.
The judge refused to rule on the merits of the case, but seemed sympathetic to TCF’s constitutional challenge. He said that the bank could reasonably expect to earn interchange fees under its contracts with the network giants Visa and MasterCard.
The decision was not an unqualified win for TCF, but Chairman and CEO William Cooper expressed cautious optimism on Monday. Cooper told Bloomberg after Monday’s court proceedings: “I think everybody is uncertain as to [the ruling] all means. [Judge Piersol] seemed to be very encouraging on the issue of equal protection.”
A competitive advantage for the underdogs?
Regardless of whether the exemption is ruled unconstitutional, it’s hard to imagine any large banks failing solely because of swipe fee laws. Small banks and credit unions tend to have higher costs per transaction, so they have smaller profit margins on interchange fees. Large banks, on the other hand, can take advantage of economies of scale to keep costs low and ride out the challenge.
In any case, large for-profit banks already trump credit unions and regional banks in terms of market share, despite the better terms offered by smaller institutions. For example, credit unions offer lower interest rates, lower fees, and higher yields on savings accounts on average than their bigger cousins. However, their market share is confined to around 6%. It is unlikely that this small, relatively underutilized group would spring to the fore solely because of interchange fees when they have yet to fully leverage what they already offer.
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