Debit after Durbin: Focus on Networks and Beyond
The release of the Federal Reserve’s new debit interchange rules is merely the latest in a series of unprecedented legal, economic and technological events that have buffeted the financial services industry over the past three years.
In many financial experts’ minds, the new rules have raised as many questions as they have settled. Some industry leaders have been quite vocal about their concerns:
- "We are only doing what Congress directed ... It appears to me that we have no choice in this matter, but to adhere to Congress.” Sarah Bloom Raskin, Governor, Federal Reserve
- “Consumers will ultimately pay a higher price for basic financial services because of the limitations this final rule creates." Fred Becker, President, National Association of Federal Credit Unions
- "The Federal Reserve very clearly did not follow through on the intent of the law." Mallory Duncan, Chairman, Merchants Payments Coalition
So, what are credit unions to make of it all?
The Fed’s ruling directly influences credit union interchange and network affiliations. Interchange is getting most of the attention and the good news is that the rule, which takes effect Oct. 1, 2011, applies to financial institutions with more than $10 billion in assets, a threshold high enough to exempt most credit unions.
Therefore, interchange – a valuable source of non-interest income – should remain stable for most credit unions at a time when large bank competitors are faced with a double-digit decrease in interchange revenue.
Less noted – but affecting all credit unions regardless of asset size – are the rules prohibiting network exclusivity. Upon initial reading, this rule may be viewed negatively from a credit union point of view.
The Fed is requiring affiliation with two unaffiliated networks to fulfill the minimum compliance requirement. In practical terms, this means your credit union can take advantage of increased interchange rates while managing costs by electing to participate in Visa or MasterCard signature and one unaffiliated PIN POS brand.
In order to best manage operations and associated costs, credit unions should align themselves with networks that provide the best overall expense and revenue structure.
It is time for credit unions to seize this golden opportunity by expanding their payments business and growing market share. You can begin by implementing payment strategies focused on revenue optimization, expense reduction, and maximizing efficiencies, while enabling a superior user experience for your members. Start by taking stock of your operations. Consider the following in your holistic assessment of your payments portfolio:
• Understand your internal and external demographics and provide the payment tools—debit, credit, prepaid, bill payment, electronic commerce and mobile commerce—your members want and have come to expect
• Evaluate your payment network affiliations and understand the total costs and benefits of your network participation
• Re-think rewards – blended and merchant funded programs will help grow your debit portfolio, but consider rewarding on the entire relationship you have with your members instead of just card transactions
• Review share draft account structures and pricing – and if you decide to re-price, make it simple, easy to understand and transparent
Today’s consumers demand the flexibility and real-time payment capability their debit cards provide. They also appreciate the safety and convenience of a payment vehicle that reduces their need to carry cash or a checkbook.
In this changing environment, a well-utilized debit card program will continue to provide credit unions with a recurring source of fee income, while enhancing member loyalty and offering greater potential for relationship growth.
The credit unions that will thrive going forward will be those that are best able to address and serve their members’ needs within an evolving funds access and payments landscape.
David Hall is director of business development for Fiserv Inc.'s ACCEL/Exchange