CUs Dodge a Cannonball

CUNA will keep up its advocacy as the interchange rule unfolds.

August 1, 2011

Credit unions that offer debit card programs dodged a cannonball with the new interchange rule the Federal Reserve Board adopted June 29.

But even though the final rule is a significant improvement from the proposal, credit unions aren’t bulletproof in terms of the potential impact of two provisions:

  1. The rate cap for large issuers; and
  2. Credit unions that use only one network.

That’s because beginning April 1, 2012, credit unions will have to belong to two independent networks, such as one PIN (personal identification number) network and one signature network.

NCUA will enforce federal credit unions’ compliance with the rule, and the Federal Trade Commission will do the same for state-chartered credit unions.

The importance of the regulatory advocacy efforts mounted by credit unions, leagues, and CUNA regarding the interchange rule can’t be overstated.

For instance, the final rule increased the cap on debit card interchange per-transaction fees
for large issuers from 12 cents
to 21 cents plus 5 basis points (bp) of the value of the transaction (there’s no dollar limit on the 5 bp ceiling), plus one cent for fraud
prevention costs if the issuer complies with the Fed’s fraud-prevention standards.

So, for example, the maximum interchange fee for a $39 transaction would be roughly 24 cents: a base of 22.95 cents (21 cents plus 5 bp of $39 or 1.95 cents) and a one-cent fraud prevention cost adjustment, for a total of 23.95 cents.

The cap is effective October 1, 2011. Even though small issuers aren’t directly covered by the cap, they’ve been concerned it could be applied to them in practice.

However, even with the higher cap, we appreciate that credit
union issuers are concerned about their debit card fee income, which helps to build and maintain net worth.

That’s why CUNA urged the Fed in numerous communications
and meetings to ensure the payment networks, such as Visa and MasterCard, provided a two-tiered fee structure to allow issuers with
assets of less than $10 billion to receive more debit card fee income than what’s permitted for larger issuers.

We emphasized that while Congress focused on costs for large debit card issuers, it’s the income for small issuers that Congress said should be protected.

Federal Reserve Board Governor Elizabeth Duke raised some serious questions at the board meeting about the treatment of small issuers, and voted against the final rule.

CUNA commended her action, as well as the resolution of Fed Governor Daniel Tarullo to require the agency’s staff to prepare, within six months, an analysis of the impact of the rule on small issuers.

A more comprehensive study on the impact on small issuers will be due in 18 months.

Also under the final rule, the Fed will publish annual lists of institutions that are covered by the fee cap and those that are not.

Payment networks will be able to readily determine which issuers on their networks are subject to the fee caps and which are not. That should facilitate their ability to provide a two-tiered system.

The Fed also will survey payment networks annually and publish each year a list of the average interchange transaction fees each network provides for those issuers that are covered and for those that are exempt. CUNA advocated strongly for such reporting.

Shortly after the adoption of the final rule, CUNA President/CEO Bill Cheney called upon all of the Federal Reserve Board governors to be vigilant in monitoring the two-tiered system, which the final rule now allows them to do.

CUNA will tenaciously encourage and closely monitor those efforts, as well as keep tabs on the networks as the implementation of the interchange rule unfolds. 

MARY MITCHELL DUNN is CUNA’s senior vice president/deputy general counsel. Contact her at 202-508-6736.