Strategies for Fading Fee Income

Don’t wait for the Fed’s final interchange rule or legislative action to prepare for lost fee income.

May 01, 2011
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Bill Lehman’s warning to credit unions concerning the debit interchange fee debate: “Make changes today.”

He urges credit unions not to wait for the Federal Reserve Board’s final interchange rule or for legislation delaying its implementation to determine how to recoup millions in lost debit interchange income.

“Take your foot off the brake,” says Lehman, vice president of portfolio consulting for Card Services for Credit Unions. “There will be ongoing pressure on our industry. Whether the interchange rules are delayed or refined, our revenue will be attacked.”

Interchange fee income


  • Don’t wait for the Fed’s final interchange rule or legislative action to determine how to recoup potential lost debit interchange income.
  • Take a broad-based approach to recoup lost income; don’t focus solely on debit cards.
  • Board focus: Tell members that CUs aren’t out to make more money, but that regulatory changes are forcing your hand.

Under the Fed’s proposal, interchange fees will decrease from an average 44 cents per debit card transaction to 12 cents. “That doesn’t begin to account for the actual debit card service costs, such as those related to fraud and systems support,” says CUNA President/CEO Bill Cheney.

Although financial institutions with less than $10 billion in assets (all but three credit unions) are exempt from the proposal, Cheney calls the exemption “fatally flawed” because there’s no mechanism for enforcement or oversight.

“Over time, smaller institutions will lose out, too,” he says. “Market pressures will force the interchange price that smaller institutions receive toward the lower, 12-cent rate.”

Plus, the regulation’s network exclusivity and routing provisions would allow merchants to route transactions to the lowest-cost network, Lehman explains. This affects all financial institutions, not just those $10 billion or more in assets, he emphasizes.

As a result, credit unions stand to lose two-thirds of their interchange income—a possible $1.7 billion blow, warns Mike Schenk, vice president of CUNA’s economics and statistics department.

“It’s one of the bigger special-interest battles I have seen in quite some time,” Travis Plunkett, legislative director of the Consumer Federation of America, told USA Today. “It’s like World War I out there. The trenches are dug, and anyone who wanders into no man's land gets shelled.”

CUNA has repeatedly asked the Fed and Congress to “stop, study, and start over” on the interchange regulations—and the message may be getting through.

The House and Senate have introduced bills that would delay implementation of the Fed’s proposal for either one or two years. Both bills propose studying how the interchange fee cap would affect card issuers, consumers, and merchants.

And on March 29, Fed Chairman Ben Bernanke told House and Senate leaders the agency couldn’t meet the April 21 deadline for its final interchange rule. However, Bernanke says the Fed will complete its interchange fee rules “in advance” of July 21, and finalize rules rules on routing and exclusivity provisions by that date.

“We appreciate that the Fed is spending the time necessary to very carefully consider the issues raised by the comment letters and is holding off on issuing final interchange standards on April 21,” Cheney says. “Nevertheless, the Fed’s admission that it can’t meet the deadline imposed on it by Congress is further proof that Congress must take action now to postpone this entire matter.”

While Cheney applauds the Fed’s announcement, he’s concerned the agency could issue a final rule without giving credit unions sufficient time for compliance if Congress doesn’t act.

And while delays in the rule’s implementation are “promising, they’re not an excuse to put off planning,” says Lehman. “Start planning today to recoup some of the money you’ll lose in the future. Now is the time to make changes.”

Next: Plan now

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