(Editor’s Note: The article below is excerpted from the white paper “2010 Debit Payments Challenges,” provided by CO-OP Financial Services. If you would like to read all the insights provided in the complete paper, you can order it for free by clicking here.)
The Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) was signed into law by President Obama with great fanfare on July 21, 2010. The event marked the start of the nine-month timetable placed before the Federal Reserve Bank for the writing of new rules governing pricing of debit transactions. This daunting task has been placed at the Fed’s doorstep by the Durbin Amendment to Dodd-Frank. Among other things, the Durbin Amendment:
- Challenges the Fed to create rules that address debit pricing at the marginal and transaction-specific level in an effort aimed at creating a “reasonable and proportional” pricing model.
- Bans practices that actually or virtually create exclusive relationships between debit card issuers and payments networks.
- Enables merchants to set minimum and maximum transaction amounts on credit card purchases.
- Prohibits merchants from discriminating against specific issuers or networks in card acceptance.
- Exempts most government benefit transfer and branded reloadable prepaid card programs.
- Exempts issuers with assets fewer than $10 billion.
At first glance, it would appear that the letter of the law relating to Durbin grants the vast majority of U.S. credit unions an exemption and the amendment will not impinge on their ability to earn debit interchange at historical levels. However, industry practices may contort Durbin’s spirit and cause major harm.
Due to its recent enactment, it is easy to overly focus on the Durbin Amendment to the Dodd-Frank Act as being the only wolf at the door. Yet, the Fed’s final rules on overdraft opt-in and the CARD Act play considerable roles in the overall non-interest income fracas.
To better prepare for the consequences of these three sets of regulations, we suggest the following:
First, it is essential that all credit unions gain awareness of what the market place is doing in response to financial reform. That is, how are payments networks, small and large commercial banks, processors and retailers posturing to either take advantage of change or to stem it? Frequent contact with industry trade associations, network partners and trusted advisors should keep awareness high.
Second, internal assessments of the combined revenue and net income impacts stemming from overdraft, CARD and Durbin ought to be updated frequently to measure the short and long term implications of these regulations. In conjunction with internal modeling on the revenue side, credit union executives should be watching for opportunities to strip non-essential processing and delivery costs from account and debit card programs – card re-issue cycles, paper statements and postage are areas worthy of review.
Third, plan for the full range of potential outcomes connected with the Fed’s rule-making activities and/or adverse actions taken by marketplace players. For instance, should the $10 billion carve-out stand up, most credit unions will foresee at least a temporary market advantage enabling them to offer better deposit account programs and debit rewards schemes. In short, prepare and launch an aggressive membership growth plan. There should also be a plan on the shelf for if/when networks capitulate to pressure and unify debit pricing into a single system. We have estimated that a 25 percent decrease might be possible, suggesting that credit unions will need to develop modest repricing strategies and encourage members to increase deposit balances to make up the shortfall.
Finally, credit union executives are reminded that debit transactions are a key part of an overarching relationship with members and that relationship has several moving parts. The endgame strategy for awaiting the outcome of overdraft opt-in, CARD and Durbin needs to encompass all components of that relationship – account pricing, customer service, all deposit account access channels and the value of affiliation.