Banks Win Again: Congress Caves on Debit Card Fees

| About: TCF Financial (TCB)

It never ends. As part of the Dodd-Frank financial reform bill, the Federal Reserve was tasked with capping the fees banks charge merchants for debit card transactions. This rule on fees was supposed to be finalized by April of this year and to take effect by July, but the banks and their lobbyists have been screaming bloody murder.

They've also been throwing around lots of cash. And it worked!

Call it the glory of "bi-partisanship." According to reports, Democrat Senators, including Jon Tester of Montana, and Republican Senators, including Bob Corker of Tennessee, are now drafting legislation to block and delay the cap on fees. All to protect consumers, of course. Actually, banks stand to lose around $12B in annual revenue from the mandated reduction in fees.

One line of argument the banks and their lobbyists are using is that consumers will just have to pay more for other bank services, like checking, or may not have access to debit cards at all. Or banks say they will have to cut jobs. In other words, the banks plan to get their hands on $12B of your money -- one way or another. The unspoken argument here is that they're entitled to it.

TCF National Bank (NYSE:TCB) has taken a different tack, by using the courts. In its suit against the Fed, TCF is claiming that because banks with less than $10M in assets are exempt from the new rule, it therefore violates their constitutional rights. Yes, you heard that right. Because Congress has passed a law that treats small banks differently on allowable fees, the large banks -- including the Too Big To Fail, bailed-out banks -- are being deprived of their rights. Here's part of the argument from the brief TCF filed in its suit against the Fed:

Could Congress knock the price of milk down 80 percent and then exempt all but the 60 largest dairies in the country? Would the hypothetical opportunity to raise butter or cheese prices save such a law from unconstitutionality?

I'm still on the fence about butter and cheese, but if there are 60 dairies out there -- each of which is considered Too Big To Fail and which could credibly threaten to single-handedly bring down the world financial system -- or if TARP banks could pasteurize and bottle skimmed milk, then I guess they'd have a point.

Even Bernanke, the man in charge of implementing the cap on debit card fees, has publicly stated his belief that the law, as written, won't work. But won't work for whom? See here.

The story here is not so much the cap on fees itself, but the ability of banks and their lobbyists to control the legislative process from start to finish. The banks spent millions on lobbying while Dodd-Frank was being drafted. Part of the payoff was that rather than having hard, fast rules included in the legislation itself, general guidelines and goals were devised, the details of which would be worked out later on by bank-friendly regulators like the Fed and the OCC.

And it's worked like a charm. By having now gone back to Congress, spreading around a little more dough and crocodile tears, the banks can now exert further control over, or in this case prevent entirely, the implementation of guidelines originally passed by Congress.