Durbin Challenger Cooper of TCF Says, ‘I Told You So’

It was an “I-told-you-so moment” Thursday morning for William A. Cooper, the outspoken chairman and chief executive of TCF Financial Corp. Cooper said many bankers dismissed TCF’s assertion that the Federal Reserve Board, in carrying out the dictates of the Dodd-Frank financial-reform law’s Durbin Amendment, would cut debit card interchange by 80%. Wayzata, Minn.-based TCF, a top 10 debit card issuer, made that claim last October when it sued the Fed to challenge the Durbin Amendment’s constitutionality. The amendment orders to Fed to regulate the debit interchange of large financial institutions using narrow criteria.

Analysts and banking executives knew big cuts were likely, but many pundits predicted something in the neighborhood of 50%. The draft regulations the Fed released last month, however, could cut the debit interchange revenues of banks and credit unions with more than $10 billion in assets by anywhere from 70% to 90%, depending on an issuer’s particular business mix. “We said in our lawsuit this is the number the Fed is going to come up with,” Cooper said during TCF’s fourth-quarter earnings call. “A lot of people in the banking industry said, ‘aw, naw, they’ll come up with something else.’ Well, voilà! They came out with what the law said.” The Fed’s two proposals have 12-cent transaction caps, but the more stringent one would require issuers to explain their expenses beyond 7 cents (Digital Transactions News, Dec. 16, 2010).

Many observers regard TCF’s constitutional challenge as a legal long shot, though Cooper says it stands a good chance. The company, which is seeking a preliminary injunction to delay the amendment’s implementation, agreed to postpone a hearing until April, when the Fed is supposed to have its final interchange regulations in place. Knowing exactly what the Fed is planning will bolster TCF’s prospects, according to Cooper. “We agreed to delay the suit to April because it is now clear what the issue is: that the Durbin Amendment comes up with a fee, orders the Fed to come up with a fee, that does not cover our cost,” he said. “We believe that is unconstitutional and we’ve got some very good lawyers that agree with us.” The suit, which also challenges the separation of debit card issuers into regulated and unregulated camps based on size, is being litigated in U.S. District Court in Sioux Falls, S.D.

TCF issues about 800,000 Visa check cards but no credit cards. For all of 2010, the company generated $111.1 million in card revenues, up 6% from $104.8 million in 2009. Debit cards brought in 21% of TCF’s non-interest revenues in 2010 and 11% of all revenues.

Referring to an unidentified report that he read recently, Cooper said 80% of the projected debit card interchange revenues banks stand to lose will go to 1% of merchants. That, he claimed, is giving pause to supporters who thought the amendment would mainly help small businesses. “This is charge Joe Lunchbucket trying to get by in his life to use his card and make Wal-Mart a billion dollars more a year. That is not a popular thing in Congress,” Cooper said. The “unintended consequences” of Durbin also are unifying large banks, small banks, and credit unions in their efforts to change or repeal the law, according to Cooper, who expects some banks or banking organizations to file friend-of-the-court briefs supporting TCF’s lawsuit.

Bloomberg News reported Thursday that U.S. Rep. Barney Frank, D-Mass., the former chairman of the House Financial Services Committee for whom the big financial law is co-named, is ready to work with Republicans to change the debit interchange regulations. That puts Frank at odds with the Durbin Amendment’s chief sponsor, U.S. Sen. Richard Durbin, D-Ill., who not only has staunchly defended is his measure but would like to expand interchange regulation to credit cards.

Asked by an analyst about separate debit interchange schedules from Visa and MasterCard, with each network having one for large, regulated issuers and a separate one for the smaller, unregulated issuers, Cooper said, “Most of the smaller banks understand and believe that is likely as time goes on and this legislation stands, that one way or another this will impact them in a similar manner.”

Visa recently committed to issuing a two-tier interchange schedule. Despite their exemption from interchange regulation, small banks and credit unions have criticized the Durbin Amendment ever since Sen. Durbin proposed it last spring. In response to Visa’s statement, Durbin reiterated his assertion that his amendment protects small financial institutions.