Good Faith + Care = 21 Cents
Credit unions got a bit of good news when the Federal Reserve reversed itself and announced that debit interchange fees will be capped at 21 cents a transaction, up from the original proposal of 12 cents, with a 1 cent fee for fraud prevention and a five basis point allowance for fraud costs.
The rule, which the Fed approved 4-1 on June 29, takes effect on Oct. 1. It is the culmination of extensive debate on Capitol Hill and at the Fed, which was triggered by the Durbin amendment to last year’s financial overhaul bill that required the Fed to issue a rule that capped interchange fees.
While the Durbin amendment included a carve out for issuers with assets of $10 billion and less, several Fed governors said they weren’t sure that it could be implemented.
Some retailers said they would pass on any savings in interchange fees to consumers while banks and credit unions said lower debit interchange caps would result in higher fees for checking and other services.
The Fed’s staff wrote in its report to the board that it is “difficult to predict the overall effect” on consumers.
The rule also requires all debit card issuers, regardless of asset size, to be a member of two unaffiliated debit payment networks. According to CUNA, approximately 800 credit unions that issue debit cards are currently only a member of one network.
Credit unions and banks have fought against any cap on interchange fees and have been involved in a clash of the titans against the retailers. The retailers had complained because the existing average debit interchange fee is 44 cents for each debit transaction.
When the Fed issued its proposed rule last December, it capped the fee at 12 cents with no allowance for fraud prevention.
On the same day as the Fed issued its rule, a panel of three federal appeals court judges upheld a lower court decision denying a request by TCF Bank to disallow the Fed from implementing the cap. TCF had argued, and CUNA and NAFCU signed a friend of the court brief supporting the argument, that the Durbin amendment forces financial institutions to do business at below market rates.
Federal Reserve Chairman Ben Bernanke said the final rule is a “good faith and carefully executed attempt to implement the will of Congress.”
However, several other board members expressed concern that the rule didn’t do enough to protect small issuers, such as credit unions.
Fed Governor Sarah Bloom Raskin said the Fed made the best of what was “ambiguous statutory language.” But she noted that as the former top regulator of banks and credit unions in Maryland she knows of the potential costs to small issuers in terms of lost revenues if the two-tier rate structure isn’t implemented.
Fed Governor Elizabeth Duke, who opposed the final rule, said it would hurt small issuers.
Fed Governor Daniel Tarullo also expressed concern about small issuers but doesn’t have an alternative proposal that would be in keeping with the law passed by Congress. However, at his suggestion, the board agreed to implement a system for monitoring network exclusivity provisions.
Nevada Federal Credit Union President/CEO Brad Beal said his Las Vegas-based $685 million institution could see its interchange revenue decline from $5.8 million to $2.5 million if the two-tiered system isn’t implemented properly.
NCUA Chairman Debbie Matz praised the Federal Reserve’s rule on debit interchange fees and said it took into account the agency’s concerns about the impact on the safety and soundness of small credit unions.
“The NCUA had strong concerns about the initial interchange fee proposal. The final regulation adopted today, however, addresses concerns raised by NCUA during the rulemaking process,” Matz said.
She praised the Fed for taking into account credit unions with less than $100 million in assets. She added that the “higher interchange fee amounts included in today’s rule are a step in the right direction.”
CUNA President/CEO Bill Cheney said his group is “appreciative that the Federal Reserve listened to the real concerns of credit unions and other small issuers with the proposal and attempted to take steps to address those problems."
NAFCU Vice President for Regulatory Affairs Carrie Hunt said the rule “doesn’t go as far as we would like in terms of covering the costs for our members. It’s an improvement over the proposed rule.”
National Retail Federation Senior Vice President and General Counsel Mallory Duncan said the Fed rule is “unacceptable to Main Street merchants and consumers who were counting on the Fed to issue a reasonable and proportional rule.”