A few credit unions have begun to detail the impact of the Federal Reserve's proposed cap on debit card interchange, telling the agency that its proposed rule will sharply hurt their bottom lines.
"We have estimated that we stand to lose $402,000 a year in interchange income from our members' debit card transactions if this Durbin bill is not amended," wrote Eileen Rivera, CEO of SkyOne Credit Union. "Our net income was only $84,000 in 2010. We will find ourselves in a position of significant negative earnings if we don't reverse this piece of the bill."
Like others from the 26 credit unions that had written individual comments to the Fed as of Jan. 20, Rivera pointed out that the existing cap did not come close to recognizing the overall costs of running a debit card program, particularly the cost of fraud that card issuers bear on their own.
The Federal Reserve did not post "more than 2,124 form letters" on the rule, but it provided samples of six form letters on the proposal that it identified. All six were from groups of credit unions.
"One of the major costs associated with debit cards is fraud," wrote Tabitha McDonner, a vice president with Southwest Airlines FCU in a comment that made a similar point. "Financial institutions bear the cost of fraud that occurs with debit card usage. Merchants are currently liable for only a small portion of fraud that occurs-mostly online/mail/phone purchases and have zero liability otherwise. Financial institutions use the interchange income to protect consumers from incurring fraud losses. That cost factor was not considered in the current proposal," she added.
The comments from credit unions and industry trade groups outlined concerns that run counter to the optimistic assertions that have been spelled out by the cap's author.
Illinois Democratic Sen. Richard Durbin has written credit union trade associations in his state that the amendment that bears his name and authorizes the cap would not harm credit unions with less than $10 billion in assets, which are supposed to be exempt from its provisions. All of the credit unions that have written so far have had less than $10 billion in assets.
Rex Fox, vice president of NW Community Credit Union, put the cap in the context of some of the reasons legislators had used to support it.
"The intent of the new legislation was to protect consumers, but in reality it is likely to backfire and actually limit choices for our members," Fox wrote. "As you well know, the existence of credit unions has put pricing pressure on the banking industry to keep their prices competitive. We are part of the solution, not the problem. I think the same can be said for many of the community banks."
Debi Southworth, a credit manager at OMNI Community Credit Union, also weighed in similarly.
"If we are not exempt from this rule, this would have a significant impact on our income," Southworth wrote. "It could lower our income by over $850,000 per year. If we were to lose this income it would have detrimental effects on other areas of business to our members. We would most likely have to raise our lending rates, which are generally lower than other financial institutions. In addition, we would have to lower our deposit rates. Even though we feel that it is important that credit unions be exempt, we believe the only way for a solution to work would be a cap. We do not feel that the range of $0.07 to $0.12 would work for financial institutions."
But of course, credit unions are not the only institutions impacted by the cap.
"Community banks, like Ohio Valley Bank, often find themselves at the mercy of the huge bank card networks," wrote Tom Shepherd, senior vice president. "The networks will be receiving pressure from the large banks, making the development of a two-tiered system unlikely.... I do not believe this proposal was designed to harm the community bank or the consumer; however, I fear that with unintended consequences, that is exactly what the end result will be."
In addition, there were a number of comments from cap supporters as well, many of whom own and operate small businesses that pay interchange fees.
John Houseman wrote the Fed to describe the impact interchange fees have on his small gas station and convenience store in a small town of about 18,000 people.
"While this [interchange] fee is only a small percentage, on items which there is very little margin to begin with, coupled with the price of these items increasing substantially as of late, it has become a prohibitive fee," Houseman wrote. "When the price at the pump is only $2.00, this fee, which typically runs 1.5%-2%, is only 3-4 cents per gallon.
However, as the price increases to $3.00, that fee now represents a cost to me of 4.5-6 cents per gallon. This is a substantial increase when my gross margin on fuel typically averages only 8 cents (including the interchange fee)." Houseman added that in 2010 he paid $48,383.15 (or approx. 5 cents per gallon sold) in interchange fees, adding that he only owns one store in a small town.