The Federal Reserve's most recent update of its ruleimplementing the Durbinamendment makes it a bit better for most CUs but leaves most oftheir deep concerns about the measure untouched.

That is the consensus of card processing and CUSO executives charged with helping creditunions craft a debit strategy in the face of what may be a slowlydeclining source of income.

The most obvious good news, for credit unions, analysts said, isthat the Fed backed away from the initial possibility of requiringcard issuers to participate in as many as four separate signaturedebit and PIN debit networks and instead agreed that card issuerscould just belong to two unaffiliated debit networks.

Credit unions benefit from this change in particular, accordingto Tony Emrick, a senior vice president with the Vantiv cardprocessor, because it eliminates a potentially large requirementthat both change the way they do business as well as issue entirelynew plastic.

Previously known as Fifth Third Processing Solutions, Vantivprocesses card transactions for over 2000 financial institutions,including credit unions but also processes transactions formerchants.

“Right now, according to the new law, it would be completelylegal for a credit union to have one signature debit paymentnetwork and one PIN-based payment network,” Emrick told to aNAFCU-sponsored webinar that looked at the final debit rule, addinglater that this might be a good strategy to help a CU betterprotect its debit interchange.

Emrick and other executives agreed that, at least for the shortterm, most credit unions and other issuers will not be affected bythe change in the overall debit interchange cap. Nearly all creditunions are exempt because they have less than $10 billion inassets. And Emrick also said that he and other card processingexecutives were now fairly confident that card processors woulddevelop a dual interchange schedule to support the exemption.

For those large issuers, the Fed increased the regulatedinterchange rate from the initial effective cap of 12 cents pertransaction to one that is at least 21 cents per transaction plus 5basis points of the transaction as an ad valorem amount meant tocover the costs of fraud. The rule included an additional penny ifthe card issuer can show it has taken reasonable steps to preventfraud.

In practical terms, for an issuer of over $10 billion in assets,the interchange on a $50 transaction went from being possibly aslow as 12 cents under the initial rule to a bit more than 22 centsunder the modified rule, assuming the issuer takes the steps toqualify for the additional one cent fraud prevention premium.

In addition, the Fed pushed the effective date of the rule toOct. 1, 2011 thus giving the industry a bit more time to make allthe needed changes.

But the updated rule did not add any changes that would protectdebit interchange for credit unions and other issuers of less than$10 billion from an eventual decline that Emrick and other analystsbelieved is very likely.

The decline will come because the regulation essentially shiftsthe interests of processors from card issuers to merchants, theysaid. 

Merchants under the regulation will be able to choose to routetheir debit transactions among a variety of processors and analystsbelieve it is likely that, without a changed regulation, adiscounted interchange rate to small issuers will become one of thethings processors use to attract new business from merchants.

“There may be a variety of grounds that processors will use tocompete,” Emrick said, including discounted debit interchange butalso covering reduced fee structures, improved process reportingand other measures. While he said he believes all processors,initially, will support a dual interchange schedule,  hedidn't know of any that are committed to supporting one into thefuture.

But there are also indications that the Federal Reserve is awareof the potential decline and that it will revisit the regulationand another analyst believed this is almost a certainty. 

Andy Brown, director of product marketing for ACI Worldwide, apayments software developer and a long time international debitindustry analyst, said such regulatory tinkering has precedentaround the world.

Based on the experiences in other countries which have alsocapped debit interchange, credit unions should expect to see theFederal Reserve revisit its Durbin amendment regulations in thenext one to two years.

Addressing a telephone conference call addressing the impact ofthe  regulations, Brown pointed out that in every othercountry that has capped debit interchange, regulators had to makechanges or fixes to the existing rule.

Brown also observed that Federal Reserve Chairman Ben Bernankehinted at the possibility when he noted the regulator would bepaying attention to how the small issuer exemption to the capworked or failed to work.

But other executives urged CUs not to focus as much on thedownsides of the Durbin rule but to also look at the opportunitiesit presented.

For example, PSCU Financial Services, a leading card processingCUSO, has urged credit unions to refrain from adding fees tochecking accounts or debit cards in reaction to the cap.

PSCU CEO Michael Kelly stressed that the regulated interchangecap still has the potential to give  most CUs acompetitive advantage in the market for checking accounts and debitcards.

“The Federal Reserve Board acknowledged what we have been sayingall along–that merchants are not required to pass along the effectof lower interchange fees in the form of lower prices toconsumers,” Kelly said in a statement. “The prospect of reducedinterchange rates for large banks has already prompted them toincrease fees. While this can negatively impact consumers, it is abonus for credit unions because it makes their debit cards evenmore attractive. Now is definitely not the time for credit unionsto raise fees on checking or debit offerings. Credit unions need toseize this opportunity to win market share from banks by attractingmembers with these loyalty-driven products,” he added.