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ARLINGTON, Va. – Credit unions say members like their signature debit cards so much that any drop in interchange income on the cards stemming from the Wal-Mart case will be made up by increased volume. However, rewards programs could get shortchanged. Barring further legal maneuvering, a key court case pitting VISA and MasterCard against Wal-Mart and a coalition of other retailers will go to trial on April 28. No one knows what the precise results of the case will be, but card analysts for investment banking firms estimate that financial institutions, including credit unions, will have to face cuts in the interchange rates for their signature debit cards of between 30 to 60%. Typical of the analysts’ comments are those of Lori Applebaum, a card analyst for Goldman Sachs. Writing in an early evaluation of the impact of the Wal-Mart suit on Bank of America and Wells Fargo, Applebaum wrote that the pressures related to the fallout from the suit will likely mean that interchange rates for signature debit fall as those for transactions using a personal identification number rise. “Pricing will likely migrate to a midpoint of the current PIN-based ($0.30/transaction) and signature ($0.55/transaction) levels – implying $0.43 per share,” she wrote. She also wrote that the financial institutions “will likely not have” any liabilities from the suit, but other analysts have suggested a negotiated settlement to the case could include the card associations and financial institutions might have to agree to cut their signature debit interchange rates for a determined time in the future to recompense the merchants for perceived losses. Credit union card experts generally agreed with the analysts reading of the suit’s likely impact on the debit rates and one firm, Florida-based PSCU Financial Services, is working on ameliorating the problem even as it prepares to roll out a rewards program that member credit unions can offer to enhance the use of the signature debit cards. Ron Silvia, director of debit services for the financial firm, acknowledged that a drop in the interchange rate would have an impact on credit unions’ ability to implement rewards programs on their signature debit cards. But, even on the eve of rolling out a new signature debit rewards product, Silvia said the firm had begun to research ways to offer rewards programs that “take the cardholder out of the middle” of the fight among card associations, financial institutions and merchants over interchange. “What we are looking at is a possible rewards program that will encourage cardholders to use both PIN-based transactions and signature transactions,” Silvia said. He said PSCU had not moved to develop such a program or product yet, but said the research envisioned a product where points could be awarded at different rates for PIN-based transactions or signature transactions, but that both transactions would be rewarded. Such a product is needed, Silvia said, because the ongoing disputes among merchants, card associations and financial institutions risked discouraging consumers from using debit cards at all. If that happened, Silvia noted, then all three of the major beneficiaries of the growing debit-based financial culture would lose out. “People seem to forget that the reason they backed debit in the first place was because it helped both merchants and financial institutions move away from checks and cash,” he said. “If we make it too difficult, or too expensive, for a consumer to use their card, they are going to leave that card in the wallet and go back to checks and cash,” he argued, stressing that he spoke for himself and not necessarily for PSCU or either of the card associations. But Jim Norris, vice president of delivery systems for the Rockville Maryland based NIH Federal Credit Union said his institution had seen such a rise in the number of debit cardholders and debit transactions that the increased volume would make up for any cut in the interchange rate. The $335-million institution will be recognized at this year’s annual meeting of the Florida-based Card Services for Credit Unions for having mounted an extremely effective marketing campaign for its debit cards last year, Norris said. The credit union increased its debit card rolls by 41% he said and has seen the card penetrate to about half the credit union’s 48,000 members. “Our members just love this card,” Norris said, although he admitted that the credit union had not been able to withdraw its ATM card in favor of people using their debit card at ATMs because a significant portion of the credit union’s memberships “will not use a debit card.” Norris said that persistent distrust of the card should fraud occur has been a significant limiting factor, and that this concern has persisted even though people understood that the card losses were covered by VISA no-loss policies. “People are afraid of the inconvenience of having losses to their checking accounts and having to work to get those losses recompensed,” he said. Significantly, Norris said his institution would have to reassess its decision to start charging card users a $1 fee per PIN-based transactions as of June 1, 2003. If the interchange rate for signature debit is cut, he said, the credit union would have to see if the new policy still makes sense. Brenda Link, manager of card services for the $1.4-billion Mission Federal Credit Union, based in San Diego, Calif. also doubted that her 86,000 debit card users would stop using their debit cards because of the interchange dispute and that the continuing strong volume would likely cover interchange cuts. She said where a cut might make a difference would be in whether the organization either signs on with VISA’s rewards program for debit cards or starts one of its own, adding that the credit union had not yet made a decision on that yet. Wayne Winkler, chief financial officer for the $400 million Mid-Hudson Valley Federal Credit Union said that his 6,000-debit cardholders would probably keep using their cards, but that the cut in the interchange rate might continue to negatively influence the credit union’s attitude toward the cards. “They just never quite took off with us,” he said, even though the credit union had been among the first to offer the cards to its 40,000 members. [email protected]

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