Minimizing the Impact Of Interchange Provisions

CUNA will continue to communicate CU concerns to the Fed.

August 19, 2010

Credit union, league, and Credit Union National Association (CUNA) advocates have worked their hearts out to oppose the regulation of interchange fees and educate members of Congress on the impact of the financial reform bill’s interchange fee amendment. Developed by Sen. Richard Durbin, D-Ill., the amendment directs the Federal Reserve Board to regulate electronic debit transaction fees for debit card issuers (financial institutions) with $10 billion or more in assets. A House and Senate conference agreed to the pending version of the reform bill, which already passed the House. At press time, the Senate vote appears likely.

CUNA is aware the Federal Reserve Board is already considering how it will implement the various provisions of the interchange amendment should the bill become law. So we’re discussing with key Fed staff credit union concerns and points for consideration regarding the impact of these provisions.

While small issuers won’t be covered by the Fed’s rule on interchange fees, they’ll still be affected by it. That’s because the Fed must write rules on interchange fees received or charged by large issuers that are “reasonable and proportional” to the cost incurred by such issuer with respect to a transaction. 

There’s great concern that under this language, the Fed will develop rules that result in much lower fees for larger issuers than credit unions currently receive and, thus, merchants may only want to accept the lower-fee debit cards. While the provisions clarify no merchant or network may discriminate between debit or credit cards within a payment network—which in essence is an “honor all cards” directive—it’s not clear how this will be enforced.

A factor that may be useful to credit unions is that the legislation was modified to generally exempt from the interchange provisions all local, state, and federal government-administered payment programs using debit cards or related payment devices. This may help ensure somewhat higher debit interchange fees for credit unions as well as for government-administered payment programs. 

Also, House Financial Services Chairman Barney Frank, D-Mass., sent a notice to House Democrats prior to the floor vote in that chamber stating that credit unions and other small issuers would be permitted to “continue to issue their debit cards without any market penalty.”

In writing its rules, the Fed must consider the similarity between debit transactions and checks that clear at par and focus on incremental costs to the large issuer (with assets of $10 billion or more) for authorization, clearance, or settlement of a particular debit. The Fed must consult with the other federal financial regulators, including the National Credit Union Administration.

The Fed may permit an adjustment to a debit interchange fee to allow for a large issuer’s costs in preventing debit transaction fraud. The Fed must write fraud-related standards for issuers, however. And issuers must comply with such standards for the Fed to allow adjustments to their interchange fees based on fraud costs.  

The Fed also has authority to collect “such information as may be necessary” from any issuer, which could include issuers that are exempt such as credit unions. While this could change, our conversations with Fed staff, however, didn’t indicate they plan to require small issuers to collect data.

But this raises another concern. Because even though any data collection on credit unions should be minimized to the greatest extent possible, the Fed, nonetheless, should take into account the impact of its interchange rate regulations on small issuers, such as credit unions. This is a major point we’ll be emphasizing in all our conversations with the Fed on interchange.

The Fed is directed to write final rules under the interchange provisions within nine months after enactment; the final rule takes effect within 12 months of enactment. CUNA has developed a credit union working group on interchange, and rest assured we’ll be drawing on its expertise as we continue to communicate concerns and solutions to the Fed.

MARY MITCHELL DUNN is senior vice president/deputy general counsel for the Credit Union National Association. Contact her at 202-508-6736.