No Fundamental Change in Interchange Expected, Experts Say CUs Should Watch Other Card Profitability Factors

The ratios are much the same for credit unions, with the difference that credit union card issuers generally rely more on interchange income because they usually neglect collecting the fee income they could, and deserve, to collect.

The reliance on card interchange has been seen by some as a weakness in CU card programs as the interchange model has come under pressure from merchants and some consumer groups. But analysts who study interchange from an economic and public policy perspective say that there is no real danger of the interchange model going away or even changing substantially over the next decade.

David John, an analyst with the predominantly conservative Heritage Foundation, a Washington, D.C. think tank, estimates that the U.S. Congress will not want to try to address such a complex and vital question as credit card interchange through legislation. He also noted that both sides lobbying the issue will likely continue to balance each other, though he noted that the merchants have begun drafting more resources into the fight.

"What you need to remember is that the system is working for the vast majority of retailers, issuers and consumers," John pointed out. "That's why the numbers of Americans carrying cards has grown at the same time that the number of cards Americans carry has also grown. In addition, the number and variety of places where you can use your card has also continued to grow. Even though some will always have complaints about how well it works, everyone has a stake in seeing the system overall continue."

Robert Litan, a banking analyst with a specialty in antitrust issues for the Brookings Institute, a Washington, D.C. think tank with a more conservative bend, added that anything that Congress might do on the issue would run counter to its history of not amending antitrust laws.

"I can count on one hand the number of times Congress has amended the antitrust statutes since they were written," Litan said. "The Congress has had an historic reluctance to change those statutes."

Litan said that where Congress could play a role on interchange was to hold more hearings, like the one on July 19 before House Judiciary Committee's Antitrust Task Force (see related story page 24).

"I think what the hearings do is to focus public attention on the problem and to serve as a shot across the bow to the antitrust regulators about cracking down if a crack down is deemed necessary," Litan said. But he added that since the interchange matter was already in the courts it was highly unlikely that antitrust regulators would get involved.

Litan also doubted that the courts would wind up making any substantial changes to interchange.

"It's almost inconceivable on its face that the court could decide that a system which has funded the creation of the card network for decades is fundamentally in violation of the federal antitrust law," he said. "It almost doesn't make sense to say it."

So what can credit unions do to hike the proportion of their non-interest income that comes from their card programs? Card experts advise reviewing card programs to make sure that their fee structure properly balances credit union income with member economies.

"It doesn't make sense in this year's market for a credit union to assess a $10 dollar fee for card payments that are two weeks late," noted CU card consultant Ondine Irving. "Credit unions can usually tighten up their fee structure to make more money and still offer their members a definitely better deal."

Other card experts have pointed out that card rewards programs drive card usage and this, in turn, drives more interchange.

–dmorrison@cutimes.com