Exploring Strategies to Manage Interchange Income

Team up with networks that value CU interests

August 30, 2011

Consider a single PIN debit network strategy as a way to relieve downward pressure on interchange income. That comes from Stu Bloom, payments industry consultant, during a recent webinar hosted by Credit Union 24.

Bloom reviewed the Federal Reserve’s final interchange regulation’s main components:

  • The interchange cap, which limits interchange income to 21 cents per transaction (plus five basis points for the transaction’s value) and a fraud adjustment fee of one cent. This applies to financial institutions with $10 billion in assets and more (currently just three credit unions).
  • The exclusivity prohibition, which requires financial institutions to employ at least two unaffiliated networks, and limits financial institutions’ control in merchant routing options.

In a single PIN debit network strategy, credit unions use one signature-debit network and one PIN-debit network, he says. And because few cards are registered to PIN networks, merchants must choose the only valid routing option—the one more profitable for your credit union. This way, your credit union is compliant and receives income.

Bloom advises credit unions to team up with debit networks that:

  •  Value credit unions’ best interests. “You want an organization that is an advocate for credit unions, is involved in the payments world with a credit union perspective, and operates with common objectives, under a philosophy that is in tune with your own,” he says.
  • Support the dual interchange schedule. This allows eligible credit unions to continue receiving market-level interchange income. “Credit unions are entitled to market-driven interchange under the law,” said Bloom. “We believe that that part of the law is equally as important as the caps themselves.”

Additionally, credit unions may find an advantage in that most competitors (primarily banks) will be subject to the interchange fee cap, Bloom says. 

Many larger institutions already are increasing fees to make up for lost income. Credit unions products and service will appear even more outstanding in comparison, he says.