Bill Lehman’s advice to credit unions waiting to see how the debit interchange fee debate will pan out: “Take your foot off the brake.”
In other words, don’t wait for the Federal Reserve Board’s final interchange rule or for legislation delaying its implementation to determine how to recoup millions in lost debit interchange income.
“Make changes today, understanding there will be ongoing pressure on our industry,” urges Lehman, vice president of portfolio consulting for Card Services for Credit Unions. “Whether the interchange rules are delayed or refined, our revenue will be attacked. Decide now how you’ll execute.”
Under the Fed’s proposal, interchange fees will decrease from an average 44 cents per debit card transaction to 12 cents, CUNA reports. “That doesn’t begin to account for the actual debit card service costs, such as those related to fraud and systems support,” notes CUNA President/CEO Bill Cheney.
Although financial institutions with less than $10 billion in assets (all but three credit unions) are exempt from the proposal, Cheney calls the exemption “fatally flawed” because there’s no mechanism for enforcement or oversight.
“Over time, smaller institutions will lose out, too,” he says. “Market pressures will force the interchange price that smaller institutions receive toward the lower, 12-cent rate.”
Plus, the regulation’s network exclusivity and routing provisions would allow merchants to route transactions to the lowest-cost network, Lehman explains. Financial institutions with less than $10 billion in assets are not exempt from this provision, he emphasizes.
As a result, credit unions stand to lose two-thirds of their interchange income—a possible $1.7 billion blow, warns Mike Schenk, vice president of CUNA’s economics and statistics department.
CUNA has repeatedly asked the Fed and Congress to “stop, study, and start over” on the interchange regulations—and the message may be getting through.
The House and Senate have introduced bills that would delay implementation of the Fed’s proposal for either one or two years. Both bills propose studying how the interchange fee cap would affect card issuers, consumers, and merchants.
And on March 29, Fed Chairman Ben Bernanke told House and Senate leaders the agency couldn’t meet the April 21 deadline for its final interchange rule. However, Bernanke says the Fed is committed to completing the rules on interchange fees “in advance” of July 21, and completing rules on routing and exclusivity provisions by that date.
While delays in the rule’s implementation are “promising,” Lehman says “they’re not an excuse to put off planning. Start planning today to recoup some of the money you’ll lose in the future. Now is the time to make changes.”
Next: Nine steps to recoup lost interchange income
Bill Merrick is deputy editor of Credit Union Magazine. Follow him on Twitter via @CUMagazine.