An amendment requiring just one percent of an industry to follow government regulated prices for a service won’t win much support from the handful of businesses falling under the regulation. So it wasn’t surprising when Minnesota based bank, TCF Financial Corp. announced plans to sue the federal government over an amendment to the Dodd-Frank Act, requiring the Federal Reserve to set the debit interchange rate for banks with more than $10 billion dollars in assets. TCF called the amendment unconstitutional and unfair. But, while the lawsuit is not without merit, it raises to question of who will benefit most, if TCF succeeds in pressuring the government to repeal the amendment.
With roughly $18 billion in assets according to the bank, the bank falls under the actual umbrella of the amendment. If enacted, the Federal Reserve will set the price for the company’s debit “swipe” fees charged to retailers. Currently, the fees amount to $100 million of the company’s annual income, according to an article posted on the Minnesota Public Radio’s website. The regulation is will likely reduce TCF’s income generated by these fees. But it will also impact all banks, regardless of size.
The TCF is one of only about 90 banks falling under the legislation out of about 7,900 FDIC insured banks. In a prepared statement, TCF officials said the amendment is unfair based on the exemption of 99 percent of banks from these regulations. But in truth, the handful of banks with more than $10 billion in assets control the bulk of the industry, holding 78 percent of banking assets, based on figures from the FDIC. With such a large share of the banking industry, these banks influence the entire market. So if they are forced to restrict their fees, competitive market pressure will push these fees down for all institutions. The Independent Community Bankers Association, cited the amendment as harmful to business, based on these competitive market forces. In addition, the amendment allows retailers to provide discounts to customers for using different methods of payment. This will force banks to compete with each other or leave the debit card industry entirely if they can not sufficiently recoup the cost of offering these services.
About 91 percent of banks with assets under $10 billion have assets of less than $1 billion and 35.5 percent of banks have assets of less than $100 million. These are the community banks, which are more susceptible to the cost of government regulations to their business model. TCF charges that the wording of amendment will push the Fed to create rates lower than the actual cost of the transaction. If this is the case, it will put even more of a burden on these small banks. Retailers will have to power to pressure certain banks out of the market by offering discounts for using payment methods of the retailer’s discretion. These fees can represent a substantial piece of the business model for the community bank. Between 10 and 30 percent of the revenue from checking accounts for a community bank or credit union comes from these fees, according to American Banker.com. Losing profit from these fees will lead to a weaker business model.
TCF’s latest earning’s report showed a significant reliance on these fees but with 18 billion dollars in assets the company has a bigger cushion and more leverage than smaller banks to recoup their loses. The question is whether these banks will be able to withstand the blow to business or will the amendment push mergers with those “too-big- to-fail” banks. Not including these banks in the amendment is a loophole that does not protect the interests of these main street banks but rather the interests of the multi-billion dollar hyper regional and global banks. While market pressures will force community and smaller banks under the umbrella of the amendment, they have no recourse because they do not technically meet the criteria for the amendment. This will undoubtedly leave them more vulnerable to the pressure to merge with larger stable entities despite the rhetoric of politicians who publicly support the breaking up of such entities. Prior to Thursday’s earning report, which showed TCF also has a heavy reliance on such fees, it seemed a repeal of the amendment would benefit the smaller banks more than the bank that actually filed the suit. But it stands to reason TCF will be alone in its fight to get the amendment repealed. Community banks already face a great deal of uncertainty as to where this legislation will leave their business. To get involved in a lawsuit against an amendment that does not technically regulate their business and is not likely to get repealed, would be a disaster for these banks.
The FDIC source can be viewed at:
http://www2.fdic.gov/qbp/2010jun/grbook/QBPGR.pdf
No comments:
Post a Comment