Although credit unions would have preferred no debit interchange rule, the Federal Reserve Board’s final rule contains important improvements from the original proposal, says CUNA President/CEO Bill Cheney. And CUNA will continue to seek further improvements.
During a conference call Thursday, Cheney lauded the “tireless efforts” of credit unions, leagues, and CUNA for helping to achieve these improvements, including the higher cap for issuers with $10 billion or more in assets. This cap increased from 12 cents per transaction to 21 cents, plus five basis points (bp) of the transaction’s value to accommodate fraud losses.
“The Fed clearly listened to credit unions about the proposed rule,” Cheney says. “For the first time, the Fed referred to the 11,000 comment letters on the proposal—half of which came from credit unions. The Fed specifically mentioned concerns for credit unions and other small issuers.”
Although the “stop, study, start over” campaign fell short, the Senate’s 54 to 45 vote in favor of the measure sent a clear message to the Fed about the effectiveness of the two-tier system. “You convinced a majority of the Senate to vote with us,” Cheney notes.
CUNA’s focus now turns to working with the Fed and congressional leaders to enforce the exemption for small issuers.
“It’s anyone’s guess how this exemption will work,” says Bill Hampel, CUNA’s chief economist/senior vice president of research and policy analysis. But the new rule is a “big improvement” for credit unions.
The effect of the cap on credit union net income will be 7 bp or less, Hampel say. Under the original proposal, credit unions could have taken a 22 bp hit to their net income.
Hampel believes large issuers likely will raise card fees substantially to recoup lost debit interchange fee income.
Not everyone was happy with the Fed’s “improvements”—namely retailers, says John Magill, CUNA’s senior vice president of legislative affairs.
“The National Association of Convenience stores is livid over this result,” he says. “They said the Fed caved to special interests. Well, we think America’s 92 million credit union members are pretty special.”
“This is as much as we could have hoped for,” Cheney adds. “We’ll do everything in our power to make it work.”
Next: Key features & effective dates
Key features of the Fed’s final debit interchange rule:
• Fees for large issuers would be capped at 21 cents, plus 5 bp of the value of the transaction for fraud losses. The interim final rule also will allow debit card fees for large issuers to be increased by one cent per transaction if the issuers meet certain fraud prevention standards.
For example, a $100 transaction would allow an issuer with the appropriate fraud prevention practices to receive an interchange transaction fee of 27 cents: 21 cents plus 5 bp of $100 (five cents) plus one cent.
• Issuers will be required to belong to two independent networks, such as one PIN and one signature network, as long as they’re unaffiliated. A card with only PIN or signature capability must have two unaffiliated networks. The proposal would have required at least two unaffiliated networks for each type of authorization.
• Issuers with assets of less than $10 billion are exempt from interchange fee caps. As CUNA recommended, the Fed will “take steps to reinforce” the exemption for small issuers.
• The Fed will publish annual lists of institutions that are covered by the fee cap and those that aren’t. This will help the payment networks to determine which issuers on their networks are subject to the fee caps.
• The Fed will survey payment networks annually and publish each year a list of the average interchange transaction fees each network provides for its covered and exempt issuers. This list should enable all issuers to more readily compare the interchange revenue they would receive from each network.
This reporting also will allow exempt issuers, Congress, and others to monitor the effect of the statute and final rules to determine if they’re having the desired policy result.
• The Fed intends to collect information every year from networks regarding their interchange fee structures and from covered issuers regarding their costs every two years. The Fed will review data collection forms for these purposes in the near future and will seek public comment on whether rule changes are needed.
The interim final rule on fraud prevention costs is effective Oct. 1. Comments are due to the Fed by Sept. 30.