As the Oct. 1 deadline for the interchange cap to go into effect fades into history, consultants who work with credit unions on managing their debit programs are urging CUs focus more attention on their debit programs.
The consultants say CUs need to do this for their own records but also to help industry and government analysts better judge the overall costs of the regulation.
All but three credit unions are exempt from the cap, but analysts contend that even those exempt CUs will see their interchange income erode under the weight of the cap's interchange limits and processing rules.
But, analysts ask, if credit unions have not taken the steps to better familiarize themselves with their debit programs and how to manage them, how will they know how much of an erosion they are seeing?
“I am confident there are still credit unions, particularly smaller asset credit unions that lack sufficient staff, that don't know how much income they get from their debit interchange or what they need to do improve it,” said Ron Silvia, director of debit services at PSCU Financial Services. “That will make it very difficult to measure the impact of the Durbin amendment over time on their income,” he added.
Bill Lehman, portfolio consultant with CSCU agreed, but noted that processing changes that the amendment included are also helping more CUs manage their debit programs more effectively.
The amendment requires that debit cards have at least two unrelated networks available to route transactions and the work of reviewing existing processing relationships or accepting bids for new ones has helped many CUs focus on their programs, Lehman said.
“The important thing is that CUs understand at least the outline of how their programs work and be able to read reports which can show them where their transactions might be gaining or losing money over time,” Lehman said.
As Silvia and Lehman indicated, the phenomenon appears tied closely to asset size. Many large credit unions are well aware of what their debit interchange brings them each month or quarter or year and how much the Durbin amendment could cost them.
Representatives of two of the three credit unions that face that cap reported facing loses from the millions of dollars to the tens of millions of dollars but have pledged not to increase fees on their members to soften the drop.
But many smaller credit asset credit unions are not as aware of their debit programs, what income they bring in and how much they possibly stand to lose under the indirect impact of the cap.
One example is the 16,000-member, $219 million Waterbury County Teachers Federal Credit Union, headquartered in Middlebury, Conn. The credit union has issued about 2,000 cards so far and only seen checking accounts penetrate to about 25% of the its membership, a fact that WCTFCU CEO George MacDonald attributed to the CU starting to offer checking accounts relatively late, only in the late 1990s.
“For much of our history, we focused primarily on savings and making loans,” MacDonald explained, but added that debit cards have become more important as time has gone on, allowing the CU to operate cashless branches.
The credit union did not have to change its debit processors to comply with the Durbin regulations. It already had two nonaffiliated networks on the cards. MacDonald said the debit program brings the CU roughly $200,000 per year in interchange and other fee income, but the CU does not track it particularly closely. “It just isn't a big part of our income stream,” MacDonald said.
At the other end of the spectrum may be the 25,000-member, $164 million Treasury Department Federal Credit Union, headquartered in Washington, D.C. It's CEO, Alfred Scipio, declined to say how many debit cards the CU issued or how much interchange they brought in, but he said the CU did track the interchange and implied it would be prepared to act if it saw its debit interchange fall.
“Under current law, we are supposed to be exempt from the impact of that amendment,” Scipio said. “If it turns out we are hurt by it, that will be a violation of the law, and we’re not prepared to comment on the matter unless that happens.”
Somewhere between the two are credit unions like the 15,000-member, $258 million Department of Commerce Federal Credit Union, also headquartered in Washington. It's CEO, Evan Clark, reported that Department of Commerce brought in $550,000 in interchange income for the last 12 months ending March 31. But the CU did not track that number themselves. They only had it because auditors broke it out as part of the audit process and included interchange from the CU's credit card as well, Clark explained.
Two of the three credit unions that are not exempt from the cap on debit card interchange say they have no plans to charge their members additional fees or take other steps to make up the loss.
But they each decried the impact of the cap on their members and said they will wind up suffering from the cap even without any additional fees.
The three are the 3.8 million-member, $44.4 billion Navy Federal Credit Union, headquartered in Vienna, Va.; the 1.6 million-member, $23 billion State Employees' Credit Union, Raleigh, N.C.; and the 1 million-member, $15.1 billion Pentagon Federal Credit Union, Alexandria, Va.
The three are the only CUs with assets over the $10 billion that the cap set as maximum amount to qualify for an exemption. CUs with assets below that amount are supposed to be sheltered from its impact, but there are concerns that they could face an erosion of their interchange income as well.
Dave Willis, senior vice president for debit cards at Navy Federal, declined to say how many debit cards the credit union issues or how much interchange income it represented, but he pointed out that the credit union is the 10th largest Visa debit card issuer in the country.
According NCUA records, the CU had roughly 2.3 million checking accounts as of the end of June and took in more than $254 million in overall fee income in 2010.
“We don't have any plans to add any additional fees or anything like that to our products or services,” said Willis. He stressed that Navy Federal's size has meant the CU has not had to add additional fees to its products to make up the income, but said the CU expected that banks and other credit unions would have to take that step.
“For a lot of financial institutions, the money has to come from somewhere,” he said.
Leanne Phelps, senior vice president of card service programs at State Employees', said her credit union also expected to take a big loss from the cap but it also would not add fees to its existing products or services or raise the fees it already charges.
But she also said the CU's members would be hurt by the ban as the loss of income from debit interchange because the CU might have to not be as aggressive in its pricing on other products or service. Phelps explained that maybe the CUs interest on savings might not be as high or the interest on different loans might not be as low as it would be otherwise.
“There's no doubt but that this is going to hurt our members,” Phelps said, “just not directly and not any way that it going to be immediately evident.”
The last of the three, Pentagon Federal, declined to comment on the impending cap or on its debit card program or what it might do to recapture some of its lost revenue. According to the NCUA, the credit union had 125,000 checking accounts as of the end of June and brought in $15.4 million in fee income in 2010.