Bill Lehman’s advice to credit unions waiting to see how the debit interchange fee debate will pan out: “Take your foot off the brake.”
In other words, don’t 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.
“Make changes today, understanding there will be ongoing pressure on our industry,” urges Lehman, vice president of portfolio consulting for Card Services for Credit Unions. “Whether the interchange rules are delayed or refined, our revenue will be attacked. Decide now how you’ll execute.”
Under the Fed’s proposal, interchange fees will decrease from an average 44 cents per debit card transaction to 12 cents, CUNA reports. “That doesn’t begin to account for the actual debit card service costs, such as those related to fraud and systems support,” notes 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. Financial institutions with less than $10 billion in assets are not exempt from this provision, 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.
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 is committed to completing the rules on interchange fees “in advance” of July 21, and completing rules on routing and exclusivity provisions by that date.
While delays in the rule’s implementation are “promising,” Lehman says “they’re not an excuse to put off planning. Start planning today to recoup some of the money you’ll lose in the future. Now is the time to make changes.”
Next: Nine steps to recoup lost interchange income
Recoup Lost Interchange Income: Nine Steps
Lehman advises taking these nine steps to prepare for a loss of debit interchange income:
1. Segment members into relationship pools. Develop rate and fee structures based on members’ account value.
“As their value diminishes—say a member has only a checking or saving account—consider ways to charge them for inactivity, or develop less-expensive products for them,” Lehman explains. “Understand who’s profitable.”
2. Encourage use of cost-effective delivery channels. Offer members incentives to use debit cards, for example, and charge for more expensive channels, such as checks.
Move members away from the teller line and toward online banking.
Let members avoid fees, and charge less than other providers—such as $10 or $15 for a late-payment fee, not $39, which is the industry average, Lehman advises.
“Credit unions invest a lot of money in a surcharge-free network to make sure we have a significant footprint of ATMs,” Lehman says. “Why do members use Bank of America terminals instead of walking a block to use a free terminal? This is an opportunity to create the activity we want: using a credit union ATM.”
4. Leverage your card processor. Consider consolidating debit and credit card processing with one provider and outsourcing collections or other functions. “Investigate your options and make an educated decision,” Lehman says.
5. Increase debit and credit card penetration, activation, and use. Growing your plastic programs will help compensate for lost revenue.
6. Re-evaluate your rewards programs. Don’t eliminate rewards; make them more affordable through merchant-funded and relationship-based rewards.
“Provide more opportunities for rewards by basing them on activity across the credit union,” Lehman advises. “This lets you spread the expense across more business lines.”
Also, consider adjusting rewards downward—banks already are. “Do this in a way that’s not extremely visible and that doesn’t affect members too negatively,” he says.
7. Tackle fraud. Examine processes and procedures to find areas to reduce fraud and its related costs.
8. Consider a general-purpose reloadable card, which is exempt from interchange regulations. Target certain markets, especially students, travelers, and the under-banked.
9. Attack expenses. “Review invoices regularly to make sure you’re being billed for what you should be,” Lehman advises. “Do this for all vendors—make sure you pay for what you get.
“Regardless of the outcome of the interchange issue, we need to rethink our business model and how we grow revenue,” Lehman says. “We don’t know what the next attack will be. But it’s important to be ahead of the curve.”