Regional lender TCF has
long enjoyed a reputation for punching above its weight in the
cards sector. That success is under threat from the Fed’s proposals
to regulate interchange fees. As Charles Davis reports, TCF is not
just aggrieved by the new legislation: it has kicked off legal
action against the Fed.
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Wayzata,
Minnesota might seem an unlikely locale for one of the
best-performing retail banks in the US. It might also seem an
improbable source for one of the most closely watched legal battles
stemming from the new financial reforms.
Then again, maybe it makes
perfect sense.
Wayzata, a western suburb of
bustling Minneapolis, is the home of bank holding company TCF
Financial, which recently notched its 60th consecutive quarterly
profit. TCF has been a strong performer throughout the economic
downturn and has made a habit of beating analysts’
forecasts.
Now it is setting its sights
on the so-called “Durbin Amendment” – the proposal was introduced
by Democrat Senator Richard Durbin – in the Wall Street Reform and
Consumer Financial Protection Act of 2010.
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By GlobalDataThe amendment orders the
Federal Reserve Board (Fed) to enact regulations that strictly
limit the amount of interchange fees which banks can charge
retailers on debit card transactions.
The proposed rule changes
also direct the Fed to measure the processing costs of authorising,
clearing and settling debit card transactions, and then to adopt
regulations setting debit card interchange rates based on those
costs alone. In total, these processing costs amount to only a
fraction of the total costs required to manage the debit card
system and deliver the product.
Finally, the amendment
applies only to banks like TCF, with $10bn or more in assets, which
constitutes just 1% of banks in the country and exempts all others.
The thousands of banks exempted from the amendment will be free to
continue to charge retailers the current debit card interchange
rate and recover all their cost plus a profit.
If passed unamended,
the legislation will hit TCF hard. TCF ranks the 34th biggest US
bank by assets, but such is its strength in the cards sector, it is
the 10th largest issuer of Visa-branded debit cards. In the first
half of fiscal 2010, almost 10% of its banking revenue of $610m was
generated from debit cards.
“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,” said William Cooper,
chairman and CEO of TCF.
“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!”
Even as it battles with
federal regulators, TCF is hedging its bets by tweaking its retail
product line to adjust to the new reforms. The $18.2bn-asset bank
with 1.7m current account customers – a huge number for a bank of
its size – launched a new checking account product in the first
quarter that imposes monthly maintenance fees.
This product could help
reduce losses on overdraft fees now forbidden by the federal
financial services reform legislation. It could also represent one
of the first attempts by a US retail bank to restructure its
products in response to the new rules, which require that customers
opt into overdraft programmes.
With its new product, TCF
follows Bank of America, Chase and Wells Fargo, all of which have
refreshed their product lines and fees structure as a result of the
legislation.
Outside the US, TCF is a
little-known regional banking star, with 441 branches in Minnesota,
Illinois, Michigan, Colorado, Wisconsin, Indiana, Arizona and South
Dakota, providing retail and commercial banking services. Now it is
generating support from across the US banking industry as it
becomes the lone bank to file a suit challenging the
constitutionality of a key provision of the banking reform
law.
Cooper said that TCF’s
lawsuit against the Fed to block caps on debit card interchange
fees was about more than preserving revenue, and that the industry
could face worse restrictions if it stands idle.
“In some ways, this is a line
in the sand for the industry. If we don’t clarify things now, we’ll
see a lot more of this.”
If the interchange rules
aren’t challenged, he said, lawmakers could eventually seek caps
elsewhere, such as charges for mortgages and other
products.
“Debit is not a profitable product in and of itself; it is
just part of a delivery system. I can’t offer a checking account
without debit.”
