TCF’s Suit Is ‘Nonsense,” Anti-Interchange Crusader Says

TCF National Bank’s federal lawsuit against the controls on debit card interchange contained in the Dodd-Frank financial reform law draws scant sympathy from retailers who have been battling against card interchange, including a merchant and entrepreneur who has been leading a crusade against the pricing mechanism for years. “It’s nonsense,” says Mitch Goldstone, president and chief executive of ScanMyPhotos.com, Irvine, Calif. “It’s just another distraction.”

Goldstone argues the suit, which names the Federal Reserve as defendant and claims that the law’s provision for the Fed to control debit card interchange is unconstitutional, represents an effort by banks and the card networks to preserve status-quo interchange pricing for as long as possible. “It’s just a big game to them,” he says. “They’re just trying to run out the clock. Every day Visa and the banks get away without addressing interchange, they make another $120 million.” TCF filed its suit on Tuesday (Digital Transactions News, Oct. 12),

Goldstone’s estimate of the daily tab for interchange includes both credit and debit card fees, he says. Debit card interchange alone is estimated to represent about $15 billion in annual income for financial institutions. TCF, which is a prominent debit card issuer but has no credit card portfolio, estimates Dodd-Frank will cut its annual interchange income from $102 million to $20 million. While Visa and MasterCard set interchange rates, interchange income flows to card-issuing banks. It is paid by merchant acquirers, which then pass the cost on to merchants as part of the discount fee merchants pay on each transaction.

Meanwhile, the National Retail Federation, another vocal critic of interchange, also dismissed TCF’s legal gambit, arguing Congress has the right to pass laws for the public good even if those laws affect private companies’ profits. “I’m having a hard time seeing where the merits lie in their [TCF’s] claim,” Mallory Duncan, senior vice president and general council for the Washington, D.C.-based retailer trade group tells Digital Transactions News. “It’s like challenging any other rational Congressional directive like the Americans with Disabilities Act. It has economic effects because it puts limits on what companies can do.”

In its suit, TCF alleges Dodd-Frank’s debit card provisions are unconstitutional because they affect only 1% of financial institutions and, by limiting what costs approximately 90 big debit card issuers can recover through interchange, will result in smaller issuers having an unfair competitive advantage. Under the law, the Fed will set rates only for financial institutions with more than $10 billion in assets. The law requires the Fed to set rates that are “reasonable and proportional” relative to banks’ actual costs. It also requires the Fed to begin issuing its regulations next spring, and the agency has completed a wave of surveys asking banks about their expenses.

While Goldstone sees TCF’s suit as part of a strategy by banks to forestall—and possibly prevent—the arrival of the Fed’s debit card pricing regime, TCF argues the legal action is necessary to fend off what the bank sees as unwarranted interference with its ability to earn a return on its debit card investment. “It is unprecedented for Congress, or any regulatory agency, to mandate a fee charged in the free market that not only denies a reasonable rate of return on investment, but actually requires the rate to be lower than the incremental cost of providing the service,” William A. Cooper, chairman and chief executive of the bank’s parent company, Wayzata, Minn.-based TCF Financial Corp., said in a statement on Tuesday.

TCF has 822,493 active Visa check card users, according to its second-quarter report. In its complaint, TCF says its debit card yield is 1.35% of the transaction ticket, and that after regulation, the yield will drop by 80%.

While keeping an eye on debit cards, Goldstone is also a lead plaintiff in a massive federal antitrust case against credit card interchange. That case consolidates a number of actions that merchants have filed against various banks and Visa Inc. and MasterCard Inc. over the past five years. He is also proprietor of a Web site, Waytoohigh.com, that tracks news and information about credit and debit card pricing and policies. For Goldstone, Dodd-Frank with its debit card restrictions is just a preliminary to the main event. “The real money is with credit card interchange fees because they are so much higher [than on debit cards],” he says.