The Durbin Amendment to the Dodd-Frank bill is legislation perfectly expressive of the Age of Obama. It directs the Federal Reserve to prescribe the interchange fees charged on debit card transactions at the incremental cost of the transaction incurred by the issuer of the debit card — if the issuer is a bank with over $10 billion in assets. The amendment directs the Federal Reserve to issue implementing regulations in a matter of months.
The amendment is an ill advised piece of special interest legislation in the guise of consumer protection. If anyone, it will serve to benefit the retail industry that supported its passage.
TCF National Bank is a regional bank whose parent holding company is based in suburban Minneapolis and is led by straight talking chairman and chief executive officer Bill Cooper. (Full disclosure: TCF is my former employer and Bill is a friend whom I greatly admire.) Yesterday TCF filed a lawsuit in federal district court in South Dakota seeking to have the Durbin Amendment declared unconstitutional and enjoining the Federal Reserve from issuing the interchange regulation.
TCF has retained Professor Richard Epstein to advise it in the lawsuit. Professor Epstein has rendered the opinion that the Durbin Amendment is blatantly unconstitutional. TCF’s press release on the lawsuit is here. The press release quotes Bill on the rationale of the lawsuit:
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 Furthermore, the Amendment affects only one percent of the nation’s banks, giving thousands of unaffected banks an unfair competitive advantage.
We believe these provisions violate our Constitutional rights on three separate grounds: the regulations take our property without just compensation and without Due Process of Law; and they also deny us Equal Protection under the law. The statute makes no more sense than regulating the price of a Burger King hamburger solely to the costs of the meat and the bun. To stay in business, Burger King has to sell burgers at prices that cover more than those costs; it also has to cover costs such as paying an employee to make the hamburger and another employee to serve it, the cost of the building and maintenance, as well as the costs incurred to advertise and promote the product. Under the Durbin Amendment, TCF only gets to recover the cost of the bun!
After TCF filed the lawsuit yesterday, Bill held a conference call in which he took questions from securities analysts who follow TCF. Several questions asked whether TCF would be joined in the lawsuit by other banks subject to the new regulation. Bill said he hoped others might join, but referred to divisions in the industry and fear among bankers that discourages them from challenging the government. It is well worth listening to the call, which is accessible here.
With his usual candor, Senator Durbin denied that his amendment does what TCF says it does: “The law in no way addresses the fees TCF, or any other bank, can charge and it does not set interchange rates. Our language simply ensures that debit interchange fees charged to retailers by the card networks–not the banks–are ‘reasonable and proportional’ to the cost of processing transactions and provides competition in an area of the market where there’s none.” Interested observers may wish to compare Durbin’s comments with the first few provisions of his amendment; the amendment expressly authorizes the Fed to limit the fees that covered debit card issuers can receive or charge and directs the Fed to issue a regulation doing so. Or they may wish to compare Durbin’s comments with Bill’s straight talk on CNBC yesterday here.
UPDATE: A knowledgeable observer makes a related point: “If you wanted to take Durbin to task a little more, you could point out that he states that the amendment regulates network fees. If you look at subdivision (a)(8), it expressly says the network fees are off limits other than to make sure they don’t raise them and pass some on to the issuer.”