Gloom and Doom on Interchange
Credit unions should continue to throw themselves body and soul into fighting a looming cap on debit card interchange, but should do so without any significant expectation that they will succeed.
That was the conflicting and gloomy message delivered from a panel of executives CUNA convened on the topic as part of its Governmental Affairs Conference.
The Federal Reserve proposed a rule to implement an amendment in last year's financial reform law that could potentially cut debit card interchange for credit unions. The new regulation is scheduled to go into effect in July.
The panel of experts explored the perils it presented as well as different approaches credit unions could take to attack it. The consensus of the panel was that Congress or the Federal Reserve could possibly act to delay the application of the rule or even repeal it, but credit unions should not plan on that happening.
"We can’t hang our hats on the idea that Congress is going to repeal this so that we don't have to deal with it," said Douglas Fecher, CEO at Wright Patt Credit Union in Ohio.
CUNA's Deputy General Counsel, Mary Dunn, agreed, noting that CUNA was working 24/7 on the interchange issue, but she did not want to give anyone any false hopes about the likelihood of any action from the Federal Reserve or Congress. "We are trying to lift Gibraltar up Mount Everest," Dunn said.
Each of the panelists brought a slightly differently colored gloom to the meeting.
Fecher brought the latest data on the likely eventual impact of the cap, particularly in light of the cap's new processing rules that, the panel predicted, would act to drive interchange steadily down. The cap could mean as much as a 90% decrease in debit interchange income for credit unions by the time it was all done, even though almost all of them have less than $10 billion in assets and therefore are supposedly protected from its impact, Fecher noted.
"The fact is that the exception was merely a back-of-the-envelope gimmick that Durbin offered because he was taking heat from senators about the rule's impact on smaller financial institutions," said Tucker Foote, MasterCard Worldwide’s vice president of U.S. government affairs. "Most senators didn't understand that the so-called exclusion was so hedged with different conditions that it effectively did not protect anyone at all," Foote said.
Dan McDermott, vice president for government relations at Visa, agreed, pointing out that what the cap appeared to give with the exclusion it then took away with its changes to routing rules. Those routing rules will make it possible for large retailers to load their POS terminals with a matrix listing higher-interchange cards that will then route from smaller debit issuers and then route all those transactions to the least expensive routing option for them. But those least expensive routing options will mean less interchange to the issuers.
The panelists also decried the Federal Reserve's rule making the measure, which appeared to take the most conservative approach to what the law said and did not take into account the true costs of debit card issuing. This even though, Dunn acknowledged, Federal Reserve staff appeared to not have understood or even taken into account a lot of the impacts the cap will have on small issuers or consumers. She noted that when questioned about these impacts by Federal Reserve governors when they discussed the rule, many of the staff responded, "I don't know" to many of their questions about those impacts.
Dunn and other panelists also agreed, however, that it was unlikely the Federal Reserve would change its rule very much, citing Federal Reserve's Chairman's Ben Bernanke's observations when questioned before Congress that the law underpinning the rule did not instruct the Fed to take those impacts into account.
If the rule winds up being mitigated or even repealed, the panelists agreed that it would be the law of unintended consequences that would likely make it happen, noting that lawmakers had not bothered to carefully look at what impact the rule would have on consumers and small issuers.
Fecher reported that his credit union had already begun to observe the rule's impact on the lowest-income consumers, particularly those who are unbanked or underbanked. Those consumers are going to be the least able to pay fees for checking accounts or use debit cards or be able to maintain countervailing balances in checking accounts to avoid those fees, he noted.
Jonathan Smith, legislative director for Rep. Gary Peters (D-Mich.), lightened the pessimism slightly when he noted that the House of Representatives never got to debate the Durbin amendment and that the amendment has been uniformly unpopular with both Democratic and Republican House members. On the other hand, without Republican control of the Senate, any move to overturn the amendment will likely end at the Senate's door, he said.