Who would have thought that little plastic debit cards would ignite a national fight over the role of government regulation?
Ever since the Federal Reserve last December proposed slashing debit-card fees charged at the cash register, a pitched battle has broken out among bankers, retailers, consumer groups and constitutional scholars.
Bank executives and their lobbyists have decried the fee limits as "price controls," and have warned that they'll do away with free checking and introduce new fees to make up for the lost income. Retailers, meanwhile, have blanketed the airwaves in the nation's capital with brash TV ads hammering banks for taking bailout money while "looking for another handout." The ad depicts pudgy bankers smoking cigars and rifling through $100 bills.
But this battle may be won in a federal courtroom in South Dakota rather than in the court of public opinion.
At a hearing Monday, lawyers will present their opening arguments in a landmark case that challenges the very foundation of the bank regulatory system. The case will determine whether it's constitutional for Congress and the nation's central bank to impose limits on the fees that banks collect. The fate of a key piece of last year's financial overhaul bill may hang on a single South Dakota judge.
Congress told the Fed to act
At issue is whether banks can continue to collect 40 to 50 cents from merchants every time a consumer uses a debit card to make a purchase in a store. The Dodd-Frank financial overhaul bill that Congress passed last year instructed the Fed to set limits on debit card fees. The Fed proposed capping the fees at 12 cents per transaction, which would wipe away about $12 billion in annual fee income for large banks.
TCF Financial Corp. argued in a federal lawsuit filed last October that the fee limit amounts to an unconstitutional "taking" of its private property and violates the equal protection clause of the U.S. Constitution because it affects only about 60 large banks. Wayzata-based TCF is seeking a court injunction to block the fee limits.
However, industry watchers say a lot more is at stake in the case than just debit card fees. A victory by TCF would embolden banks to challenge key provisions of last year's Dodd-Frank bill, which greatly expanded the government's regulatory authority over banks. Banks are looking to weaken other elements of the act, such as the creation of a new federal agency charged with protecting consumers and restrictions on derivatives trading.
"It's a hugely significant case," said Ed Mierzwinski, consumer program director of the U.S. Public Interest Research Group, a consumer advocacy group in Washington. "If the banks can prove in court that this bill stinks in one area, they can move on the whole act, and try to argue that the whole thing stinks. It's a way to reopen the law."
The legal skirmish has created some strange bedfellows. The Credit Union National Association, a Washington trade group that normally relishes the opportunity to bash banks, has signed on to a friend-of-the-court brief supporting TCF's arguments. And 21 state banking associations, led by the Minnesota State Banking Association, have joined in filing a brief in favor of TCF, though most of their members are exempt from the fee limits because they are too small.
Even civil rights groups have weighed in. Early this month, the NAACP, the nation's oldest civil rights group, warned that new fee limits, though "well-intentioned," could create further obstacles for people to access banking services if free checking disappears. The group urged Congress to delay implementation pending further study.
Two giants dominate
Retailers and small businesses have formed their own group, known as the Merchant Payments Coalition, to lobby for the fee limits. They are less interested in the debate over the constitutional limits to federal power than in the rapid increase in debit card fees, which they argue is the result of anti-competitive practices by the nation's two dominant payment networks, Visa and MasterCard.
Economists at the Federal Reserve have estimated that the total value of debit and credit card swipe fees increased 28 percent between 2002 and 2007. Merchants insist that they have little choice but to accept the terms dictated by Visa and MasterCard, because more than 80 percent of their consumers use cards from one of these two giant networks. Some retail lobbyists have referred to the two payment networks variously as a "cartel" and a "duopoly."
In a legal brief filed in the TCF case, James C. Miller III, a Reagan-era budget director and former chairman of the Federal Trade Commission, argued that regulatory intervention is needed to prevent monopolistic pricing practices by the two giant payment networks. "This is truly a case of market failure: Networks with monopoly power over merchants are setting prices," Miller wrote.
Consumer groups have argued that the cost of debit card fees falls disproportionately on the 25 percent of the population that is either un-banked or relies on cash or checks, as these consumers never receive the benefits of debit card reward programs. The high debit card fees are "a regressive tax on the poor," the U.S. Public Interest Research Group's Mierzwinski said.
Early on, critics dismissed TCF's case as legally groundless. However, as hundreds of pages of friend-of-the-court briefs pour in, a TCF victory is no longer seen as far-fetched by some industry experts.
They point to recent successes by conservative constitutional tacticians in rolling back government regulation. In January, a federal judge in Florida ruled that Congress exceeded its constitutional authority to regulate interstate commerce when it enacted a law that requires most Americans to obtain health insurance, a key provision in the Obama administration's health care overhaul. The case is being appealed.
The odds seem to be shifting
"Six months ago, I really thought [TCF's lawsuit] was a 'Hail Mary' pass," said Jeff Platter, a vice president at Haberfeld Associates, a bank research and marketing firm in Lincoln, Neb. "Now, it's more like a 20-yard pass. But a good defender could still pick it off."
For TCF, Minnesota's third-largest bank by deposits, the stakes are high. The bank collects more than $100 million a year from debit card swipe fees. A 12-cent limit on debit card fees would reduce the bank's annual profits from $120 million to $70.4 million, a 40 percent drop, the bank estimates.
TCF has warned that the Fed's proposal would reduce its return on equity to "far below the amount necessary for TCF to attract and retain capital" and would "compromise its long-term viability."
The limits are scheduled to go into effect in July unless they're blocked in court or in Congress. A bipartisan group of federal lawmakers recently introduced a bill to delay the rules.
It is not known when the South Dakota judge will make a ruling on the TCF injunction request.
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