A small surge in the use of cash and the popularity of ATMs, especially fee-free ATMs, may be among the unintended consequences of the financial reform act that President Obama signed into law earlier this year.
That's because the law contained an amendment sponsored by Senator Richard Durbin that mandated federal regulation of debit card transactions. The amendment's instructions to the Federal Reserve to set an interchange rate for debit transactions drew the most credit union attention and opposition, but credit union ATM experts say other parts of the amendment could also make lasting changes in the ongoing competition between cards and cash.
"Depending on how this [new law] is implemented, we could see an incremental increase in cash and cash transactions," said Jim Hanisch, executive vice president with CO-OP Financial Services. "But this will likely be a slow sort of glacial change rather than anything precipitous."
According to statistics from CO-OP, the Federal Reserve and the major card brands, cash accounts for roughly 31% of purchase transactions in the U.S. right now, a figure that has remained remarkably stable and only declined slightly in the last decade. Hanisch expects that changes in the way debit cards are regulated could send that percentage up by a percentage point or two but not much more than that.
Hanisch and other ATM authorities also argued that looking at such large macro-economic trends will miss a big part of the regulatory impact. The last decade has seen the rise of a class of consumers, particularly among the young, who rarely use cash to pay for anything. Unlike previous generations of consumers, Hanisch observed, these younger consumers are used to being able to use their debit cards unencumbered to make purchases of almost any amount. Restricting debit card usage or shifting the decision about which card to use to which card might cost more to use may undercut consumer behavior that has taken years to develop.
Jim Park, CEO of the Credit Union 24 ATM and EFT network, largely agreed. Park and Hanisch are of the generation that tends to keep at little cash in his wallet, but Park acknowledged that many younger members of the network's participating credit unions have a different attitude toward cash and cards but that could be at risk.
Whether cash begins to get the upper hand over debit cards will depend on the actions of two separate groups that together introduce a great deal of uncertainty, Hanisch and Park said.First, merchants will have to take advantage of the part of the Durbin amendment that allows them to set minimum purchase amounts for credit cards, Also, consumers will have to confuse that limit on credit card transactions for all card transactions.
Hanisch and Park fear some of that confusion might take place because consumers have proven easy to confuse on the differences between transaction types in the past. Further, the standard for consumers breaking with their debit cards might be as low as raising repeated questions about whether they are accepted or for what transaction amounts.
"If you have to wonder whether or not you can use your debit card when you buy the four-dollar sandwich down the block, you might as well just start carrying cash," Park noted.
He and Hanisch also speculated about the impact of the other great unknowns stemming from the Durbin amendment. First, it exempted any financial institutions of less than $10 billion in assets from the debit interchange cap. And, some banks have already begun to mention fees for some debit card transactions to help recoup some of the lost interchange income.
"I think we need to see how these regulations shake out," Hanisch said. "It's not clear to me that the separate track for those institutions below $10 billion will really be workable or how many banks are going to start charging for at least some of their debit transactions. It's really hard to tell what might happen without knowing more about where those policies might go."
Hanisch speculated that if the exemption from the cap for debit card issuers of under $10 billion succeeds, credit unions might be able to keep their debit cards free of charge to their members, and if banks start charging fees for some debit card transactions, they might have another competitive edge over banks. It wouldn't be impossible for credit unions to start offering their members surcharge-free debit cards in much the same way as they offer surcharge-free ATMs, Hanisch remarked.
Park urged credit unions not to stop working with regulators and politicians to craft the regulations.
He also recommended that credit unions keep an eye out for a proposal that failed in the legislative process that might resurface again in regulations. "One of the amendments that got knocked out of the bill would have capped ATM fees at, I think, 50 cents," Park said. "Credit unions need to pay attention if that surfaces as a regulation, and then oppose it if it does."
Park explained that this type of fee cap would both cut into credit unions' income from nonmembers using their ATMs as well perhaps leaving their members fewer ATMs. He estimated that more than 70% of ATMs deployed by independent service organizations (organizations not affiliated with a financial institution) would likely be pulled from service if a low cap were put into place. This would both be inconvenient for credit union members needing access to their cash, he said, but may also put pressure on credit unions to deploy more ATMs themselves to meet member demand.