Banks To Challenge Interchange Fees in Court

After an oh-so-close loss in the Senate last week, the banking industry is now planning to take the fight over debit card interchange fees to court.

The Federal Reserve has yet to issue a finalized rule, but once it does, the banking industry is likely to file suit, claiming that the Fed has misinterpreted the Dodd-Frank Wall Street Reform and Consumer Protection Act. The industry claims that the so-call Durbin Amendment, which imposed the cap, allows banks to make a “reasonable and proportional” profit. The industry also claims that the Fed is not taking into account the various costs associated with operating a debit card network.

Minnesota-based TCF National Bank sued the Federal Reserve in October 2010, challenging the constitutionality of the rule. The first hearing is set for this week.

Under the Dodd-Frank Act, debit card fees, which currently average about 44 cents per transaction, are capped at about 12 cents per transaction. Sens. Tester (D-MT) and Corker (R-TN) introduced an amendment that would have delayed the implementation of the fee cap, but it failed to pass the Senate by a six vote margin. The final count was 54-45, with 60 votes needed for passage.

Banks Lose and Retailers Win -- Senate Rejects the Tester-Corker Amendment to Delay Rule Capping Debit Card Fees

The attempt to delay the implementation of the “Durbin Amendment” – Sen. Richard Durbin’s (D-IL) amendment to the Dodd Frank Act that would cap what banks can charge for debit card interchange or “swipe fees” –failed to collect the 60 votes needed in the Senate this afternoon. Sponsored by Sens. Tester (D-MT) and Corker (R-TN), the amendment fell short by six votes -- the final count was 54-45.

Currently, swipe fees average 44 cents per transaction and generate more than $12 billion annually for financial institutions. Under the new Dodd-Frank framework, the fees would be capped at 12 cents per transaction starting on July 21, 2011 (the one-year anniversary of Dodd-Frank’s enactment).

The swipe fee debate has pitted banks against retailers and forced many in Congress to choose among friends. Banks have insisted that the current swipe fees are necessary to pay for security and consumer protections included with these transactions and to keep other banking fees low. Retailers have countered that the high fees force them to raise prices and are hurting small retailers. With Fortune 50 companies on both sides, both the banks and the retailers launched considerable lobbying efforts.

Though the retailers prevailed by a narrow margin, the banks did pick up some unlikely support. The Durbin amendment passed last year by a vote of 64-33. Of the 56 members still in the Senate who originally voted with Sen. Durbin, only 45 Senators today voted in support of Durbin’s position. The Tester-Corker amendment picked up eight cosponsors yesterday, four of whom voted for the Durbin Amendment last year: Sens. Michael Bennet (D-CO), Chris Coons (D-DE), Kay Hagan (D-NC) and Mike Crapo (R-ID). The Senators said they changed their positions due to concern over the Durbin amendment’s impact on small banks. Even more surprising, House Financial Services Committee Ranking Member Barney Frank (D-MA) announced this morning that he supports the Tester-Corker amendment and believes that the interchange fee cap requires further study.

Sen. Corker said it is unlikely that the Senate will address this matter again during this Congress. Meanwhile, several states, including Minnesota, Maine, Massachusetts and Rhode Island, are currently considering bills that would give retailers the authority to choose which cards to accept based on the cards’ associated fees.