Plan B for Tackling the Interchange Fee Cap
I don’t think it’s too much of a stretch to say that our industry’s fight against a Draconian interchange fee cap reached epic proportions in the weeks leading up to the June 8 vote in the Senate on the Tester-Corker amendment to delay and study the Fed’s proposed rule. Credit unions fought valiantly. While not getting the 60 votes required to overcome a filibuster, we convinced a large number of senators to reconsider their prior vote through a groundswell of grassroots outreach not seen in the Capitol in many years.
In fact, our efforts yielded well over 100,000 contacts to senators and a dramatic increase of support in the Senate for the Tester-Corker amendment. Credit unions’ efforts to combat the retailers and the poorly conceived interchange provision in the Dodd-Frank Wall Street Reform and Consumer Protection Act were commendable, and it was one of our greatest assets in the fight.
While we were deeply disappointed in the outcome (achieving a majority, but falling six votes short needed to break Sen. Durbin’s filibuster and pass the amendment), we are not simply sitting idly by. From the beginning of this fight, I suggested that credit unions needed to have a Plan B, a contingency plan they could put in place no matter what the outcome of the vote.
It would be fair to say that being prepared is just second nature to me, and we at NAFCU also have our Plan B. Once the Senate vote occurred, we immediately appealed to the Federal Reserve and President Obama to help minimize the negative impact on credit unions and their members. We are hopeful that they will recognize the folly of this government-imposed price cap and the necessity of adequately compensating debit card issuers like credit unions to cover the critical costs of fraud and data security as part of the interchange fee and making the two-tiered system that would protect small issuers effective.
For now, all eyes are on the Federal Reserve, and there is rampant speculation as to what its final rule will look like with a final ruling expected soon–quite possibly before this article is published. Because the Fed received comment letters that are quite detailed and extensive and the issue raised by the comments are complex and difficult to address, we believe the Fed will modify its rule—in some fashion. By how much remains to be seen. Presumably, there will be an upward increase in the transaction fees institutions can charge. However, we remain concerned that it will not be enough to fully cover the costs of interchange for credit unions. We do hope that the Fed takes to heart our plea that fraud costs be included. As we have argued many times, credit unions are the ones stuck footing the bill when a retailer like Michaels not only has a data breach, but essentially absolves itself of any responsibility for the loss. Those costs should be reflected in the Fed’s rule.
We hope that Fed Chairman Bernanke’s expressed concerns regarding smaller financial institutions and the proposed exemption will help structure the final rule in a way that affords credit unions greater protection. Furthermore, given the Fed’s delay in putting forth a final rule, we also hope it will put forth a similar delay in its implementation when it is released.
Another factor that could have a major impact on interchange is the TCF National Bank lawsuit challenging the Fed’s rule and the related Dodd-Frank provisions. Even as I write this column, we are anticipating the results of the recent oral arguments appealing the loss of the preliminary injunction. Additionally, we believe that once the Federal Reserve issues the final rule, there is potential for other litigation as well.
In the meantime, as noted above, credit unions need to have a contingency plan. To that end, NAFCU offered a webcast on May 19 with Dave Schneider, president of PULSE, “The Future of Debit Cards: How to Prepare for Significant Losses in Interchange Income,” that addressed some possible courses of action given the looming changes in debit card interchange fees that credit unions can still access. Here are some of the recommendations:
• Know your membership and its usage trends.
• Use survey data to assess your offerings in concert with your pricing and costs.
• Segment your services to target the different needs of your members.
• Determine if you need to make any adjustments to your portfolio to increase revenue and improve your member loyalty.
As this issue continues to unfold, you can expect that we will remain in the forefront of providing credit unions the additional tools and expertise needed to effectively serve their members and manage their bottom lines.
Looking ahead, I would encourage credit unions to draw from the many lessons the battle on interchange has afforded us. As an industry, we should take great pride in our ability to rally the strength of our numbers nationwide. Also, we should note who our congressional champions were in this process. There will be other legislative fights, and it would serve us well to support those elected officials that helped us on this critical issue and keep in mind those who did not.
Interchange is not the only threat to credit unions. Preserving the federal tax exemption and contending with increased government regulation represent sizable concerns in the near future. We must not retreat. On the contrary, we should be emboldened to fight even harder as other issues confront us.
Fred R. Becker Jr. is president/CEO of NAFCU.
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