With the Fed’s Debit Rule in Place, Anti-Durbin Crusader TCF Throws in the Towel

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In yet another major development in a week of big debit card news, TCF Financial Corp. on Thursday said it would drop its lawsuit challenging the constitutionality of the Durbin Amendment, which regulates debit card interchange and network affiliations. An appellate court earlier in the week rejected the Wayzata, Minn.-based banking firm’s request for a preliminary injunction to prevent Federal Reserve regulations implementing the amendment from taking effect while its suit was pending. The Fed released its long-awaited final rule Wednesday.

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“While we continue to believe that the Durbin Amendment is unconstitutional because it requires below-cost pricing and exempts 99% of all U.S. banks, we believe our lawsuit has served its purpose in demonstrating the unfairness of the Durbin Amendment and that it is time for us to move on,” TCF chairman and chief executive William A. Cooper said in a statement. “The Federal Reserve Board’s final rule is an improvement from its initial proposal and recognizes many of the points we made in our case.”

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TCF has $18.7 billion in assets and, with more than 800,000 debit cards outstanding, is one of the nation’s largest debit card issuers. The bank cited the denial of the injunction request and the uncertain effects of the Durbin’s Amendment’s split between large and small issuers as grounds for its decision to seek dismissal. The amendment regulates only the debit interchange of about 100 issuers with $10 billion or more in assets. TCF faulted that dichotomy in its lawsuit, saying it gives an unfair competitive advantage to small issuers. (Despite the protection the amendment affords their interchange revenues, community banks and credit unions fought the Durbin Amendment on fears that the gravitational pull of lower interchange for the big banks would eventually pull down their own revenues.)

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“At this stage of the litigation, it was not clear that the exemption for banks with total assets under $10 billion would be effective,” TCF said. “In view of this [injunction] ruling along with [Wednesday’s] announcement of the Federal Reserve Board’s final rule on debit interchange, which does not resolve the question of the potential effectiveness of the $10 billion exemption, TCF today decided to ask that the U.S. District Court in South Dakota dismiss its case without prejudice.” The term “without prejudice” means TCF could re-file its complaint later.

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TCF, which doesn’t issue credit cards, had said the Fed’s original proposal of a 7- to 12-cent interchange cap would have dire consequences for its revenues: an annual revenue loss of $89 million if interchange were capped at 7 cents per transaction, and $78.2 million under a 12-cent cap. Those estimates amounted to 86% and 75%, respectively, of the bank’s $104.1 million debit and gift card interchange revenues in 2010.

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Under the final rule, the Fed set a rate of 21 cents plus 0.05% per transaction. The increase in the flat-fee part of the original cap came from more transaction-processing costs that the Fed said issuers could include, and the central bank said the 5-basis-point component was aimed at enabling issuers to recover some fraud losses.

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TCF sought to challenge the Durbin Amendment’s constitutionality by suing the Federal Reserve Board and the U.S. Treasury Department’s Office of the Comptroller of the Currency. The bank filed its suit last October in the federal court in Sioux Falls, S.D. TCF appealed that court’s decision not to grant an injunction to the 8^th U.S. Circuit Court of Appeals in St. Louis. A three-judge panel there affirmed the lower court’s decision.

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How much TCF spent litigating its case, which one anti-interchange crusader called “nonsense,” was not immediately available. Many observers said from the beginning that TCF’s lawsuit was a legal long shot, but payments consultant Eric Grover, principal of Minden, Nev.-based Intrepid Ventures, says TCF still had a sound argument despite the increases in the Fed’s final rule. “That’s still almost 50% less than current interchange rates,” he says. “It is a taking, it is price controls.”

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Grover says he’s surprised that TCF dropped its suit, but he applauds Cooper for at least challenging what he calls the current “get along/go along” attitude he claims most banks currently have with Washington regulators. Cooper “calls them like he sees them,” says Grover.