TCF Tells Court Durbin Could Force It To Lay off Thousands

Big debit card issuer TCF Financial Corp. might need to lay off more than 2,000 employees to offset potential revenue losses if the Federal Reserve Board’s most draconian debit interchange price-control proposal takes effect, TCF said in recent court filings.

Wayzata, Minn.-based TCF also said that its annual revenue loss would be $89 million if its debit interchange were capped at 7 cents per transaction, and $78.2 million under a 12-cent cap. Those estimates amount to 86% and 75%, respectively, of the bank’s $104.1 million debit and gift card interchange revenues in 2010.

The first of the Fed’s two proposals would limit debit card interchange to 7 cents but possibly allow up to 12 cents provided an issuer proved certain costs, while the second would impose a straight 12-cent cap. Using cost estimates from a Fed survey of debit card issuers, TCF says it would lose 14 cents per transaction with the 7-cent cap and 9 cents per transaction with the 12-cent cap.

The Fed floated both caps in its proposed rules to implement the Dodd-Frank financial-reform law’s Durbin Amendment that orders the board to regulate debit interchange using narrow criteria and also gives merchants more transaction-routing options. Dodd-Frank’s interchange controls apply only to issuers with assets of $10 billion or more. The Fed is supposed to release final interchange rules by April 21 that would take effect in July.

TCF Financial’s main subsidiary, TCF National Bank, issuer of 800,000 Visa debit cards but no credit cards, is challenging the Durbin Amendment’s constitutionality by suing the Fed in U.S. District Court in Sioux Falls, S.D. TCF’s estimates on the effects of debit regulation on its business came last week as the bank and others filed a flurry of documents ahead of an April 4 hearing on TCF’s request for a preliminary injunction that would prevent the interchange controls from taking effect. The U.S. Justice Department, which is defending the Fed, and the U.S. Treasury Department’s Office of the Comptroller of the Currency, regulator of national banks, are seeking to have the suit dismissed.
 
TCF’s layoff and revenue estimates are included in a declaration from David M. Stautz, the parent company’s senior vice president, controller, and assistant treasurer. Stautz in November provided estimates of an approximate 80% debit revenue loss under the Durbin Amendment as passed by Congress, but he had his staff re-crunch the numbers after the Fed issued its actual proposals. Stautz provided eight scenarios of layoffs ranging from 355 up to 2,022. The lowest estimate assumes the 12-cent cap becomes final and TCF recovers 20% of the lost revenues through what it calls mitigation, or cost cuts through employee reductions. The highest job-loss prediction assumes a 7-cent cap and all mitigation achieved through cuts in head count. TCF estimated 1,777 job losses, about a quarter of its work force according to the Minneapolis Star-Tribune, under the 12-cent cap and 100% job-cutting mitigation. The estimates assumed an average employee cost of $44,015 in salary and benefits.

“Should the bank reduce staffing as set forth under any of the eight scenarios above, and thereby reduce costs, the bank would also suffer additional lost revenue by virtue of less lending, less deposit gathering, and less customer service, in amounts very difficult to predict,” Stautz said.

TCF said it has already cut costs over the past two years because of instability in the financial markets and new regulations, and it isn’t enthused about imposing debit card transaction fees or monthly fees for debit card users to compensate for lost interchange. Stautz said the bank in March 2010 “tried to add a monthly account-maintenance fee and that resulted in a high level of checking account losses.” That could happen again with debit fees, he said, adding that TCF’s smaller competitors wouldn’t be subject to interchange controls.

TCF’s dire predictions come in the wake of growing political opposition to the Durbin Amendment, with recent news reports from Capitol Hill predicting that at least one bill that would delay or scrap the debit regulations is imminent. Even some banking regulators, including Fed chairman Ben Bernanke, have expressed reservations about aspects of the amendment, and a chorus of small banks and credit unions claim that, although their interchange isn’t regulated, they’ll be drawn into the economic fray and could lose revenues.

But the Durbin Amendment has some powerful defenders, not the least of whom is its namesake sponsor, U.S. Sen. Richard Durbin, D-Ill. And merchants, the ultimate payers of interchange, are solidly behind the measure. The Merchants Payments Coalition, consisting of more than 20 national trade associations and 80 state groups representing 2.7 million stores, last week filed a friend-of-the-court brief opposing TCF’s injunction request. The MPC challenged TCF’s legal arguments, including the bank’s claim that the amendment violates the Constitution’s due-process clause by not allowing it to earn a reasonable return on its investment. The group said TCF’s rights haven’t been violated and that Congress was within its authority to pass the amendment.