Visa will offer a dual debit interchange schedule that network sources say should allow credit unions and other smaller asset debit issuers to substantially shield their debit interchange income from drastic decreases, at least temporarily.
Visa's announcement came on a Jan. 7 Web conference conducted by senior Visa executives for the executives of payment networks and CUSOs, network sources confirmed. One of the participants was Bill Sheedy, group executive for the Americas for Visa. Sheedy told executives that the debit interchange schedule for card issuers that are exempt from the proposed debit interchange cap would be "substantially similar" to existing debit interchange, the sources reported.
But he also noted that debit interchange would still likely face downward pressure and that future debit interchange levels could not be guaranteed.
The move became necessary after the Federal Reserve proposed a cap on debit card interchange for debit card issuers with over $10 billion in assets, fulfilling an amendment to last year's financial services reform measure.
Under the terms of the Durbin amendment, named after its chief sponsor, Illinois Senator Richard Durbin (D), debit card issuers with assets of less than $10 billion are supposed to be exempt from the cap, but neither of the major card brands had previously announced that they would create or support a system that would set debit interchange at one level for one set of issuers and at another level for another set of issuers. Prior to Visa's announcement, debit card issuing credit unions had begun to steel themselves for a 70% to 90% drop in their debit interchange income when the Fed's new rule is finalized, tentatively scheduled for mid-July.
Executives from many credit unions and community banks had wildly hoped for the Visa announcement and confirmed they had strongly lobbied the card brand for it, but many analysts were surprised by the move. Many had supposed that Visa would not come out with a dual interchange schedule out of concern for the pressure it would face from its larger asset issuers, which were thought to strongly want a single, capped interchange system.
But Howard Polack, a senior analyst with Aite Group, a financial analysis and consultancy firm, explained that while large asset issuers might have the most Visa transactions in a given year, there are a lot more smaller asset debit card issuers, and they bring the ubiquity the card brands crave.
"Visa is making moves to appease the concerns of small banks, who have feared becoming collateral damage," Polack said. "That move will also likely appease investors concerned over the overall impact on Visa."
But Polack also called the move a reprieve for credit unions on the debit interchange front rather than a pardon and pointed out that a situation where larger asset debit issuers make less money per debit transaction than smaller asset debit card issuers is not sustainable over the long term.
Credit union, CUSO and network executives left the Web event substantially encouraged and expected that other card brands and payment processors would follow Visa's lead. But some also pointed out that the interchange schedule is only half the picture and that Visa's announcement would not have an impact on the network choice provisions in the Federal Reserve's proposed debit interchange rule. Those provisions would also continue to exert downward pressure on debit interchange, the sources said.
This is because previously merchants had fairly limited choice or control over what networks processed their debit transactions and thus little say in their transaction cost if they followed the card brands' network rules. But with the increased freedom they have under the new law, analysts and executives suppose they will choose their lowest cost network option and that will consistently lead to lower interchange.
"Admittedly, this is a penny business," one acknowledged, "and the differences in prices we are talking about may come down to fractions of basis points, but if network A said it can cut a merchant's debit card cost by that fraction under network B's price, why wouldn't the merchant go with network A?"
Reactions from other quarters to the announcement have contained the same skepticism about whether the other parts of the law would not effectively undercut debit interchange for small issuers.
The American Bankers Association and the Independent Community Bankers Association praised the move but said it was not enough.
"The recent news that Visa will try to implement a two-tiered pricing system for debit interchange does not alleviate the negative consequences that the Durbin amendment, and the subsequent rules proposed by the Federal Reserve, will have for banks of all sizes-particularly community banks-and the consumers they serve," said ABA chief counsel Kenneth Clayton. "Despite the statutory attempt to separate out smaller banks from the price controls embodied in the Durbin amendment, the marketplace will do what it always does-drive business to the lowest cost option. A very real conclusion that can be drawn is that this type of government interference in marketplace pricing is inappropriate, counterproductive and extremely harmful to consumers," he concluded.
Karen Thomas, senior executive vice president with the ICBA, echoed Clayton.
"Despite Visa's actions, the Durbin amendment requirements will not prevent large retailers from steering customers to cheaper rate-controlled cards issued by large banks," Thomas said. "Further, Visa's intention leaves unanswered questions about how interchange price-fixing will affect community bank customers, how other networks will respond to the Federal Reserve's proposed rule to implement the Durbin amendment and what effect industry pressure will have on network pricing going forward."
Sen. Durbin was the only voice to unambiguously praise the Visa move, seeing in it proof of his belief that the law would not be as harsh to small debit card issuers as his critics had suggested it would be.
"The amendment I offered last year sought to bring reasonable regulation to the debit interchange system while preserving the ability of small banks to compete in the debit card market," Durbin crowed. "Visa's announcement confirms what I have long argued: that small banks and credit unions will not be hurt by this regulation and will in fact see benefits from it," he said, adding, "As the Federal Reserve moves toward final implementation of this amendment, it's time to move past the misrepresentations and scare tactics and to recognize the strong pro-consumer and pro-competitive benefits of interchange reform."
Perhaps significantly, as of press time, MasterCard declined to say whether or not it would follow Visa's move.
"MasterCard is continuing to evaluate the viability of a two-tier interchange structure for debit and excluded products," the No. 2 card brand said in a Jan. 7 statement. "We will be thoughtful and comprehensive in our analysis of this issue. We believe it is not prudent to make such a decision in advance of knowing all the facts."
But some CU executives said they remained hopeful that MasterCard will also support a duel interchange schedule for debit cards, pointing to MasterCard's last sentence:
"As we have done for over 40 years, MasterCard is committed to maintaining a competitive interchange structure that appropriately balances the payments ecosystem, and we plan to continue doing that going forward."
Polack interpreted the statement to mean that MasterCard had not yet figured out where its most strategic path would be.
"Of course, this gives MasterCard an opportunity to pick their battle of either appeasing their large bank partners who will not be able to compete on a level playing field and trying to keep their investors happy," Polack said. "If MasterCard decides to go the same path as Visa, unless both networks are willing to stand up against their largest clients, the two interchanges will likely align in the not-too-distant future," he added.