Now that the Federal Reserve has publicly discussed the proposed rules surrounding debit card interchange and routing in light of the Dodd-Frank Wall Street Reform Act and the Durbin amendment, financial institutions should be preparing for the impact.
The Fed released two proposals for regulation of debit card interchange fees, neither of which distinguishes between authorization methods for debit transactions.
Each issuer would be permitted to determine the maximum amount of an interchange fee that it may receive with respect to a debit card transaction by calculating its average variable cost for authorization, clearance and settlement of electronic debit transactions, but the fee is capped at 12 cents. If an issuer doesn't want to bother determining its average variable costs, an issuer would be permitted to rely on a safe harbor rate set at 7 cents per transaction.
Alternatively, the Fed proposed setting a cap on the amount of an interchange fee that any regulated issuer could receive at 12 cents per transaction. Under this alternative, any interchange fee at or below 12 cents per transaction would be permitted.
Every financial institution, regardless of asset size, must participate in at least two unaffiliated debit payment networks.
The Fed's first proposed alternative for network routing requires at least two unaffiliated networks for each debit card, regardless of the authorization method supported by each network. Thus, a debit card would be compliant if it was enabled to be routed to one PIN and one unaffiliated signature debit network.
The second proposed alternative requires at least two unaffiliated networks for each authorization method for each debit card. Thus, a debit card would be compliant if it was enabled to be routed to two unaffiliated PIN and two unaffiliated signature debit networks.
Expect fast and furious change in the debit payment industry. The greatest downward pressure on interchange will be for financial institutions over $10 billion in assets, but other issuers will feel the pressure as well. Credit unions need to prepare now for the coming changes through the following actions.
Re-evaluate Debit Rewards Programs. If interchange revenues fall, you may want to look at your current rewards program structure to determine if it is cost-effective to continue it as is or whether an overhaul is required. Many credit unions are looking at migrating to merchant-funded reward programs that cost the credit union little but provide great value to cardholders. If you are forced to eliminate point-based rewards, these can provide a safety net for your debit program.
Examine Fee Structure. Credit unions should consider the current fee structure of their checking accounts, including monthly and annual fees, per check, electronic transactions and fees for paper statement delivery. Large national issuers are already proposing new fee structures, such as the elimination of free checking. Closely assess the situation and monitor consumer sentiment about new fees to determine a sound fee strategy.
Build PIN Debit Volume. Credit unions should identify which type of debit transaction provides the most value. With signature and PIN debit interchange converging, PIN debit may provide more net value taking into consideration cost to process, fraud and interchange income.
Initiate Programs to Drive Growth. Continuing to grow your portfolio through penetration, activation and usage campaigns is vital to profitability. Before these changes take effect, CUs should be active in getting more cards into the market, focus on campaigns to activate both new and inactive cards and increase usage on active cards. An active debit card portfolio can soften the effects of reduced interchange.
Tony Emrick is senior vice president of business development of Fifth Third Processing Solutions LLC.
317-564-8210 or Tony.Emrick@53.com