In a First, Interchange Gained Federal Regulation
This year saw a regulation capping the interchange card issuers were able to earn on a debit card transaction come into effect for the first time in history.
Passed and signed into law in 2010, the legislation mandating the cap, colloquially known for its chief sponsor, Sen. Richard Durbin (D-Ill.), had been included relatively late in the process of drafting the Dodd-Frank package of financial industry regulatory reforms. Controversial from the start, the amendment mandated that debit card issuers of more than $10 billion in assets would have to live under the cap while those under $10 billion, including all but three credit unions, would be exempt from the cap.
In practice this meant that card processors needed to adopt two different debit interchange schedules, which they did, but also brought what critics called excessive pressure on credit union debit interchange. A dual interchange system, critics charged, would not be sustainable over the long run and credit unions and smaller banks would only see their debit interchange fall over time to the same level as those institutions living under the cap.
While this might still happen over time, the immediate consequence of the interchange cap was to help further differentiate credit unions from larger banks as the banks began to either cut back on free checking or charge fees on debit cards. Credit unions, generally, declined to do either.
Even two of the three credit unions that are subject to the cap, 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., reported they would not add any additional fees to their checking or debit programs, though they said they would take an income hit from the cap.
Consumers reacted strongly to the banks’ moves to recapture debit interchange income, objecting particularly vociferously to Bank of America's plans to charge a $5 monthly fee for the use of its debit card. Eventually, these consumer objections coalesced into a national movement, Bank Transfer Day.
But even as credit unions wrestled with how to welcome new members’ fleeing higher debit fees, they also had to prepare their own debit programs for the new rules. Although most credit unions were exempt from the interchange cap, they were not exempt from the rules about having a minimum of two unrelated debit processing networks on each of their cards. In practice this meant that some credit unions had to take bids from new processors to add another network to their programs while others had to sort through several networks and decide which ones to drop. In general, card consultants advised CUs to limit the number of debit networks they carried in order to make it more difficult for retailers to lower the debit interchange.
Consultants also urged credit unions to improve the monitoring of their debit card interchange so that they would be able to measure the impact of the cap, if any. Currently, many credit unions lack a basic understanding of their debit interchange and would be unable to detect any potential loss.
One worry that has not yet been realized has been the concern that retailers might act to steer consumers away from CU-issued debit cards because of their higher interchange fees, but one California credit union that raised the possibility of such steering found its concerns did not pan out.
Robert York, CEO of the 13,000-member, $108 million California Bear Credit Union, Los Angeles, wrote an email on Nov. 18 to other California credit union CEOs reporting that some of the CU's members and employees had reported difficulty using their CU-issued debit cards. He said some retailers appeared to want them to use cards issued by larger banks.
York sent the email to see if any other CUs had seen the same thing and reported that California Bear had received no positive responses. Further, one of the retailers named in his original email, the Regal Entertainment Group, parent company of Regal Cinemas, denied outright that it had been trying to influence debit card choice.
“Our policy is to accept any and all payment cards–regardless of issuer,” said David Ownby, chief financial officer at the Regal Entertainment Group. He also denied the company had a policy about refusing debit cards based on their date of re-issuance.
The other retailer York mentioned in the email, LA Fitness, a chain of fitness and health centers, did not respond for comment about the question.
Craig Shearman, vice president of government relations for the National Retail Federation, declined to comment on the specifics of York's email but pointed out that card economics made the allegations doubtful.
“Most consumers might have a number of different credit cards in their wallets or purses but usually only one debit card,” he remarked. “So if a retailer was going to try to steer a transaction to a different card that would most likely be a credit card where the swipe fees are higher.”
But while the interchange cap's direct impact on CUs, at least in 2011, appeared limited, the cap already has begun to reverse some of the progress the payment industry made in getting consumers to pay more often with cards than cash.
According to media reports, merchants like coffee shops, newsstands, vending machine deployers and others have started trying to find ways to get consumers to pay with cash rather than debit cards after card processors eliminated the interchange discounts they had offered on transactions of less than $10.
The loss of the discounts has meant that interchange on transactions of below $10 has sometimes jumped from 2-3% to almost 21%, which is the regulatory mandated debit interchange cap. This has led to merchants offering discounts for consumers who pay in cash or, in some cases, deciding to only take cash.
Should the trend continue, it will represent the most recent and obvious reversal of a tendency to move payments steadily further away from cash and onto cards. In the last five years, the ability to pay by debit card has appeared in the fast food industry, the taxi industry and in vending machine sales.
CFPB Tackled Many Issues
Though it lacks a permanent director, that hasn’t prevented the Consumer Financial Protection Bureau from tackling a range of issues–from credit card disclosures to mortgage forms–during its first months of operation.
The bureau, an independent agency housed inside the Federal Reserve that began operating on July 21, received considerable attention when it announced an agreement with Pentagon FCU to test a simplified credit card form. The form is approximately 1,100 words, compared with the average form which is 5,500 words.
It contains information such as interest rates, the costs of balance transfers and cash advances, and explains how interest rates are calculated. The form is also on the bureau’s web site and the public can comment on it and make suggestions.
The form is part of the bureau’s Know Before You Owe, program, designed to give consumers extensive information about the cost of obtaining credit.
Pentagon FCU is one of three credit unions–the other two are Navy Federal CU and State Employees of North Carolina CU–that because they have assets of greater than $10 billion are subject to the direct oversight of the CFPB on consumer protection matters. The bureau’s regulations are applicable to all credit unions but the enforcement for most is handled by their safety and soundness regulator.
Credit card regulation will be a large part of the bureau’s work. During its first three months of operation, the CFPB said it had received 5,074 complaints about credit. Of those, 13% were related to billing disputes, 11% concerned APRs and interest rates, and 10.8% were related to identity theft, fraud and embezzlement.
Another part of the bureau’s Know Before You Owe, program is its work in combining the mortgage disclosure forms required under the Truth in Lending Act and the Real Estate Settlement Procedures Act. The bureau is seeking input on the content of the form, and the agency has done focus groups in different parts of the country to help it further fine tune the form.
The CFPB, which was created by the Dodd-Frank financial overhaul bill, is responsible for enforcing all or part of 14 consumer protection laws. The laws include the Consumer Leasing Act, the Electronic Fund Transfer Act, the Equal Credit Opportunity Act, the Fair Credit Reporting Act and the Truth in Lending Act.
Until it has a permanent director, the agency can revise existing regulations but can’t issue new ones. It also can’t regulate non-bank entities such as payday lenders and mortgage companies.
In December, the CFPB began a 90-day comment period to solicit input on ways to change the rules it enforces so as to make it easier for banks, credit unions and others to follow the rules.
President Obama has nominated former Ohio Attorney General Richard Cordray to run the agency but his confirmation has been blocked by Senate Republicans. They have vowed to prevent the approval of any head of the agency until there are structural changes to the agency, including having it run by a five-person board, rather than by a single director.