(Editor’s Note: The statement below represents CO-OP Financial Services’ assessment of the Federal Reserve’s published draft rules relating to network interchange and exclusivity).
The Federal Reserve has published draft rules relating to network interchange and exclusivity. The Fed has asked for comment in all areas and posed specific questions relating to costs and routing.
WHAT WE KNOW
Interchange – The Fed has proposed a $0.12 cap per transaction on interchange with a $0.07 “safe harbor” floor. This translates to a 73 to 84 percent reduction in debit interchange. This is a far deeper reduction than the financial industry expected. It is prudent that you reflect this reduction in your budgets beginning July 2011.
How specific rates will be established will be up to the networks and the financial institutions. Fraud avoidance costs continue to be studied and will be incorporated, but possibly after implementation in July 2011.
Routing Exclusivity – The Fed suggested two models. The first calls for each card to have a signature brand and a nonaffiliated PIN brand; the second stipulates that each card have two nonaffiliated signature and two nonaffiliated PIN brands. The Fed asked for comments on these alternatives. We believe the latter – the second model – is impractical and detrimental to interchange income.
Timing – Final rules will be published in April for July implementation, with the caveat that some issues may not be fully defined.
WHAT WE DON’T KNOW
A member of the Fed’s Board of Governors specifically asked about exemptions of which all but three credit unions would be exempt. Fed staff responded that exemption pricing would be up to the respective networks. The staff member also noted the possibility of merchant discrimination against exempted cards despite both the law and network rules.
As expected, the draft rules have created as many questions as they have provided answers. The key issue for most credit unions remains the exemption. The Federal Reserve left it up to payments networks to implement the exemption. At this time we do not anticipate that the exemption will result in the exclusion of institutions below $10 billion in assets.
As we wrote in our white paper, “2010 Debit Payment Challenges: An Update on Regulatory Reform,” CO-OP Financial Services suggests the following course of action:
- Debit Strategies. The growth rates for both signature and PIN debit have remained strong. The impact of the Durbin Amendment should drive credit unions to re-think strategies about debit products and their positioning and pricing to members.
- Pricing Strategies. Various pricing strategies can be used to modify member behavior to increase volume and drive members to the revenue generating access vehicles. Continue to help members make the transition to card-based and electronic payment.
- Reduce Expenses. In addition to new pricing strategies, credit unions can mitigate the impact from lower revenues by paying close attention to the expense side of the business. Areas to look at in particular are fraud, card activation and card issuance.
- Scenario Planning. Plan, but don’t overreact until we know if the exemptions will work. We recommend using revenue and cost data to plan through various best and worst case scenarios, including debit impact, debit strategies, and account and relationship strategies.
You can read the complete white paper, downloading it for free, by completing the brief registration form here.
CO-OP Financial Services will continue to provide information and we suggest you comment directly to the Fed and through your trade associations, and please be prepared to assist in any lobbying efforts they may pursue.