Update on the TCF Fight Against Durbin

The court battle between TCF National Bank (NYSE: TCB) and the Board of Governers of the Federal Reserve continues, as TCF tries to stop enforcement of the Durbin Amendment. Late in February, the Federal Reserve filed a motion to dismiss TCF’s complaint.

In their motion to dismiss TCF’s claims, the Government argues that TCF two primary requests should be denied. In particular, the Government argues that TCF’s request for an injunction preventing enforcement of the Durbin amendment should “be dismissed as a matter of law”. The Government makes a similar argument that TCF’s claim that the Durbin amendment is in violation of the Equal Protection Clause of the Fourteenth Amendment.

While the lawyers argue over the merits (TCF’s lawyers will file a response to the Governments motion in the next few weeks), we are more interested in the Federal Reserve’s view of the factual background, as it provides an interesting insight into the Federal Reserve’s view of the debit card industry. Below is an excerpt of the Federal Reserve’s statement of the factual background, with certain citations provided for your reference.



In the past two decades, consumers in the United States have shifted away from checks and cash as a form of payment and toward payment cards, including credit, debit, and prepaid cards.[1] Nearly 38 billion debit card payments were made in the United States in 2009.[2] Debit cards are now used in 35 percent of noncash payment transactions, and have eclipsed checks as the most frequently used noncash payment method.[2]

The current payment card system was established in the 1970s by Bank of America, operating its BankAmericard system, the predecessor to Visa U.S.A. (“Visa”).[3] Visa and MasterCard International (“MasterCard”) are currently the two largest payment card associations
in the United States, accounting for three-fourths of the payment card market in 2008.[4] Visa does not issue payment cards; instead, it licenses member banks to do so.[5] Any financial institution that is eligible for FDIC deposit insurance may join Visa. Visa members have the right to issue Visa cards and to acquire Visa transactions from merchants that accept Visa cards. In exchange, they must follow Visa’s bylaws and regulations. Card networks offer several different types of payment cards. A credit card allows a cardholder to make a purchase and pay off the card-issuing institution over time. Purchases made on a “travel and entertainment” card, or charge card, must be paid off at the end of the month. A debit card allows a holder to access his or her bank account directly. As a result, debit cards are generally offered only to customers who have checking accounts at the issuing bank. One of the original purposes of debit cards was to help banks reduce the high cost of processing checks.

A debit card may be used to withdraw funds from an automated teller machine (ATM) or as a “point of sale card,” where payment for a purchase is deducted directly from the cardholder’s deposit account. Issuing banks can offer both “signature debit” cards, which generally require cardholders to authorize transactions by signing receipts like a credit card, and PIN debit cards, which evolved from ATM networks and typically require the holder to authorize a transaction by entering a personal identification number (PIN).

The Visa network used by TCF is organized as a so-called “four-party system” in which the four parties are the consumer, the bank issuing the debit card to the consumer (the “issuer”), the merchant, and the merchant’s bank (the “acquirer”). In a typical four-party-system transaction, the consumer initiates a purchase by presenting his or her debit card to a merchant. An electronic-authorization request with a specific dollar amount and the cardholder’s identity is sent from the merchant to the acquirer to the network, which then forwards it to the issuing bank. The issuer checks the transaction against its file of active card accounts, and sends a message authorizing or declining the transaction through the network to the merchant. Later, the issuer posts a charge for the transaction to the customer’s account, and the acquirer posts a credit to the merchant’s account. Within a few days, the network clears the transaction and determines interchange and network fees, and the issuer and acquirer send and receive payments through their accounts at settlement banks associated with the network.


Various fees are associated with every debit card transaction. The interchange fee, which accounts for the bulk of the fees assessed,6 is paid by the acquirer to the card-issuing bank.[1] Switch fees are charged by the network to both acquirers and issuers.[2] The acquirer charges the merchant a fee, a large portion of which typically is the interchange fee. The most recent data gathered by the Board indicates that debit and prepaid debit card interchange fees totaled $16.2 billion in 2009. The average interchange fee for all debit transactions in 2009 was 44 cents per transaction (or 1.14% of the transaction amount) — 56 cents per transaction for signature debit (or 1.53% of the transaction amount), and 23 cents for PIN debit (or .56% of transaction amount). Interchange fees may also vary by merchant type, merchant sales volume, or card program within the network.[1] In the United States, interchange fees are determined at the network level.

According to Visa, the fees “are determined by Visa and provided on Visa’s published fee schedule, or may be customized where Members have set their own financial terms for the interchange of a Visa Transaction or Visa has entered into business agreements to promote
acceptance and Card usage.” Interchange fees are “consistently monitored and adjusted” by Visa, “sometimes increased and sometimes decreased — in order to ensure that the economics present a competitive value proposition for all parties.”

“Visa may establish different interchange reimbursement fees in order to promote a variety of system objectives, such as enhancing the value proposition for Visa products, providing incentives to grow merchant acceptance and usage, and reinforcing strong system security and transaction authorization processes.”

As competition for cardholders has intensified, issuers increasingly have turned to rewards programs, which offer cash back, points, airline miles, and other incentives, to attract and retain cardholders. Rewards programs are funded in part by interchange-fee revenue.


While the facts, as stated in the motion, appear to be generally reasonable, what may be unreasonable is that many of the “facts” are based on data collected by the Federal Reserve in their Notice of Proposed Rulemaking – a data collection process that many argue was rushed based on the late introduction of the Durbin Amendment into the Dodd-Frank bill. The hurried collection of these “facts” are part of the reason why many opponents of Dodd-Frank are requesting that further study and analysis be performed before implementing any rules.

Read the full Motion to Dismiss here.

Selected citations from the excerpt of the Motion to Dismiss:

[1] Interchange Fees and Payment Card Networks: Economics, Industry Developments, and Policy Issues
[2] Debit Card Interchange Fees and Routing (Federal Register).
[3] The Interchange Fee Debate: Issues and Economics
[4] Payment Card Interchange Fees: An Economic Assessment (2008)
[5] In re Visa Check/MasterMoney Antitrust Litigation, 192 F.R.D. 68, 72 (E.D.N.Y. 2000).

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