Editor’s Note: The statement below represents an update to CO-OP Financial Services’ assessment of the Federal Reserve’s published draft rules relating to interchange. If you would like to learn more, join us on Fri., Jan. 28 at 11:30 a.m. Pacific time for an informational webinar. You can register to attend here.
CO-OP Financial Services has been following the interchange issue for many years and has taken an active role on behalf of credit unions through our support of CUNA, the Electronic Payments Coalition (EPC), and the Electronic Funds Transfer Association (EFTA). Despite our best efforts, the Merchant Payments Coalition and Senator Richard Durbin were successful in adding an interchange amendment to the Wall Street Reform Act.
On Dec. 16, the Federal Reserve Board approved release of draft rules for comment pertaining to the Durbin Interchange Amendment. Comments are due by Feb. 22, with final rules to be published by April 21 and taking effect July 21, 2011. As with most draft rules, they create as many questions as they provide answers.
The first question is: What does this mean to credit unions?
- The current national average interchange for signature debit and PIN debit transactions is $0.44. The new rules propose a cap of $0.12 interchange per transaction and a “safe harbor” floor of $0.07. Many analysts believe even the $0.12 cap is below cost for most financial institutions. The statute was extremely restrictive on what costs could be considered.
- The $0.12 interchange cap represents a 73% decline in current interchange revenues. Using data from the 2009 Callahan and Associates survey, credit union debit interchange income is estimated at $2.2 billion. A 73% decline represents a potential $1.6 billion in revenue and income for credit unions at risk. To put this in perspective, Callahan reports total credit union net income after assessments in 2009 as $1.54 billion and estimates 2010 at $4 billion.
- The Durbin Amendment does exempt all financial institutions below $10 billion in assets as well as government card payment programs and reloadable prepaid cards. The Federal Reserve in comments during the Dec. 16 meeting indicated the networks (Visa, MasterCard, Star, NYCE, Pulse, etc.) will need to determine if they will offer interchange pricing tiered by asset size or card purpose. The lawmakers clearly intended that “exempt” mean current interchange income be sustained for exempted parties, but unfortunately that was not clearly defined in the law. Visa recently announced they will implement a two tier interchange structure with the exempt tier at least initially being very close to existing interchange rates.
- Fraud costs are not part of the $0.07 to $0.12 proposal. The Fed was dissatisfied with the fraud cost information gathered and was going to do additional surveys. Another consideration is whether the Fed will mandate new fraud technologies and how costs for those technologies will be recovered. Fraud costs are not likely to be part of the rule published April 21.
- The Fed proposed two routing rule alternatives. The first, that each issuer have one signature debit network and a second non-affiliated PIN network. The second alternative was that each issuer has two signature debit networks and two PIN networks. This second alternative would impact all credit unions and we believe would be unworkable from both a technical and market perspective. The first alternative will impact some credit unions, but would be the most practical and least disruptive.
The headline in all of this is that $1.6 billion in annual interchange income is potentially at risk for credit unions. This brings us to the second question: What can credit unions do?
- First and foremost, all credit unions need to support our movement’s trade associations in their activities.
- Write a comment letter to the Fed. CUNA and your league are drafting samples, but if you want your letter to have full impact, personalize it from your credit union:
- The lawmakers intended that credit unions under $10 billion in assets be exempted. Encourage the Fed to enforce this exemption and see that current interchange levels are maintained for credit unions under $10 billion in assets.
- If the exemption is not enforced, what will the impact be to your credit union? How much net income will your credit union lose? The calculation is simple, 73% of current debit interchange revenue. What would you need to do with pricing and how would that impact your members?
- Even though credit unions should be exempted, we think it is important you comment on interchange rates. Two alternatives were proposed, a $0.07 to $0.12 range dependent upon individual institution costs or a $0.12 cap. We believe the only operationally workable solution is their second alternative, a cap.
- The Fed also asked for comments on routing. We think the only practical solution is their first alternative: one signature debit network and one unaffiliated PIN network per card issuer.
- Fraud remains a huge concern. Please comment on the cost of fraud prevention and the cost of fraud to your credit union.
- Talk with your network representatives and encourage them to comply with the intent of the law and maintain current interchange levels for credit unions under $10 billion in assets. Visa has announced their intent to implement a two tier structure, but even they left the door open for change in response to market conditions. We expect MasterCard and other networks to follow suit. CO-OP asks all credit unions to encourage the two tier structure and sustaining current interchange levels.
The House Banking Committee is likely to hold hearings to review the interchange provisions. We need to support this process even though the likelihood of any new legislation is low. Interchange is a critical issue to credit unions and the payments industry. We encourage all credit unions to make their voices heard on this issue.