The Federal Reserve Board has reached out to credit union trade associations as part of its first steps toward crafting a cap on debit card interchange.
Executives with both CUNA and NAFCU confirm that they have met with Federal Reserve regulators charged with developing the debit-interchange regulation and that the regulators have sought their input. Sources have also confirmed that the central bank will distribute a survey to both the large-asset debit card issuers and debit card processors to gather data about how the issuers have structured their debit card programs and how the processors handle debit card transactions.
NAFCU and CUNA executives said they are primarily interested in giving regulators a full picture of the costs that debit card programs carry. Having a complete understanding of the costs will help the regulators set an interchange cap that might come closer to covering those costs, the executives explained.
The associations also want to keep an eye on how the cap will be accepted by the marketplace.
"We also want to see how the marketplace, the merchants and the card processors adapt to the new regulation and the cap," said Mary Dunn, CUNA's deputy general counsel. "The merchants have a tremendous degree of latitude on which processors they will use for a given transaction. Will they choose a processor that doesn't recognize the separate interchange schedule for smaller institutions?"
Dillon Shea, NAFCU's associate director of regulatory affairs, said his group is taking a similar stance. "We are definitely following the development of this regulation closely because it is extremely complicated and involves many different elements," he said, adding that the complexity makes it that much easier for regulators to get it wrong.
The problem, both Dunn and Shea agreed, is that credit unions and small banks make up the majority of debit card issuers in the U.S. but remain a minority when it comes to the volume of transactions processed. This suggests that processors with business plans that allow for a lot of financial institution clients would be more open to adopting two procedures for calculating debit interchange-one for issuers with more than $10 billion in assets and one for everyone else. But processors whose business plans count on processing lots of transactions for relatively few clients might simply adopt the lower interchange formula for institutions with more than $10 billion, and those would be the processors that merchants would use.
The cap, strongly advocated by Sen. Richard Durbin (D-Ill.), was part of the Dodd-Frank Wall Street Reform and Consumer Protection Act that President Barack Obama signed on July 21. It mandated the Federal Reserve to regulate the debit card interchange generated by cards issued by financial institutions with more than $10 billion in assets and to make sure that interchange was "reasonable and proportional" to issuer costs.
One issue will be whether the Federal Reserve will have to consider only the incremental costs of processing a debit transaction versus processing a check. This was a key point in the debate leading up to the law, as merchants claimed the costs of processing debit transactions are much lower while issuers claimed the costs are significantly higher.
CUNA believes the law allows the Federal Reserve to consider the reasonable costs of running a debit card program. According to the association, that includes the costs of processing, including transaction authorization, settlement and clearance; recordkeeping; staff support, including training; marketing, offering, opening, maintaining, and closing an account; charge-offs; call centers; paying fees to networks and fraud prevention.
A spokesman for the Federal Reserve declined to comment on the procedures the central bank is using to develop the regulation, but documents from the Fed suggest that it is taking the concerns of credit unions and small banks into consideration.
A 17-page survey that the Federal Reserve expects to send to large debit card issuers in early September asks detailed questions about card program costs, including the costs generated by having to replace debit cards that have been compromised. The survey also asks about the costs to issue and produce cards, generate and maintain PINs, particularly customized ones, prevent fraud and investigate fraud claims and charge back transactions.
In their conversations with Federal Reserve officials, credit unions strove to remind regulators of the effects of other parts of the regulation as well, Dunn said. For example, the law requires all debit card issuers to belong to two independent payment processing networks, even if they are small issuers.
Dunn acknowledged that to deal with the new rule, credit unions would have to find their way through a complicated and largely unfamiliar regulatory landscape, as the federal government has never before acted to cap the costs associated with any particular payment method. But she nonetheless expressed confidence that credit unions would be able to minimize unintended damage from the new rule, citing the fact that Rep. Barney Frank (D-Mass.), chairman of the House Financial Services Committee, and Senator Durbin "have said strongly that they don't want to see credit unions hurt by this regulation."