Concern Now? Tiers Won't Work
TUSCALOOSA, Ala.-While many credit union execs took some solace in the fact the Fed raised the proposed interchange cap, a majority of those interviewed by Credit Union Journal remain concerned that the two-tiered system will not work.
Last week the Fed's Board of Governors approved a cap of 21 cents per debit transaction with an additional five basis points of the value of the transition for fraud costs. The Fed also agreed to push back the effective date of the rule until Oct. 1.
Tommy Cobb, CEO of $50-million Tuscaloosa CU, fears the new rule could "slowly bleed credit unions to death one diverted transaction at a time. If the intent of the new rule is abided by, there will be zero impact. However, if nothing is put in place to protect members from merchant discrimination…"
Wayne Vann, president of the $1.2-billion Navy Army FCU in Corpus Christi, Texas, believes the final rule does not provide the Federal Reserve with any checks and balances.
"They can't control the processors' development of a two-tiered system nor the merchants' sharing the increased revenue with consumers. Do we really have individuals that naive," questioned Vann. "All I have to say is Congress is for sale, big money wins, and the consumer loses. All institutions will lose revenue, whether exempt from the rule or not, and consumers stand clearly in the crosshairs of where the revenue stream will be replaced. The cost of business has just gone up and there is no putting the toothpaste back in the tube."
Stephanie Sherrodd, EVP/COO of the $1.7-billion TDECU in Lake Jackson, Texas, was less emphatic about the outcome of the interchange rule, calling the Fed's final rule a "compromise. But like most compromises, no one really feels better at the end of it."
Her concerns, like those of many, stem from merchants potentially being able to direct transactions to their own benefit under the new rule.
"The impact will be felt around the ability of retailers to direct transactions specifically through debit networks versus credit," said Sherrodd. "It will allow merchants to refuse a credit transaction when a PIN option is available. When you think about the major retailers, Walmart for example, if it gets to the point where they stop allowing credit transactions on debit cards that could have a very significant impact on interchange income long term."
Much Remains To Be Seen
Doug Fecher, CEO of the $2.2-billion Wright-Patt CU in Fairborn, Ohio, termed the final rule an improvement over the original proposal.
"But our main concern is whether the exemption for issuers under $10 billion will ultimately work," said Fecher. "We need to keep Congress's attention on the issue so that in the event the exemption doesn't work legislation can be passed to restore the original intent. The extent to which this new rule is paid for by consumers remains to be seen, though I'm convinced the cost of banking services in this country will rise because of the new rule even though it caps interchange at 21 cents per transaction rather than 12 cents."
Dana Rawlings, CEO of the $134-million Pioneer West Virginia FCU in Charleston, W.Va., surmised that the news from the Fed "could have been worse-21 cents plus one cent for fraud prevention and five basis points for fraud losses is better than the original 12 cents. All in all that is twice what the first study recommended. Who are these people who come up with this stuff in the first place-12 cents, seriously? Tens of millions of dollars were spent on lobbying efforts from the banks, credit unions, and merchants and now the Fed changes it to something a little more in line with common sense. Thank goodness someone listened. Now the real question is what about the two-tiered program...I wish that I could go to work for just one day and not have to think about what's coming down from Washington that will have a negative impact on our credit union and our members."
Recovery After A Bad Start
Brent Lister CEO for the $380-million First Florida CU in Jacksonville, Fla., is pleased the Fed listed to credit union comments and increased the cap, but underscored that the Fed missed the mark "100% the first time. The new cap is double their original figure," stated Lister, sharing concerns about the Fed moving too fast on the proposed rule.
Lister lauded the credit union community for moving quickly to share facts about the impact of the proposed rule on financial institutions and consumers, noting the speed at which CUs, leagues, and trade associations moved played a key role in getting an improved final rule.
But Stuart Perlitsh, CEO of the $300-million Glendale Area Schools FCU in California, was not complimentary of the CU trade groups, saying, "Our national trade associations, both NAFCU and CUNA, once again failed to clearly articulate a compelling argument, and maintain the existing interchange rates."
Steve Swofford, CEO of the $440-million Alabama CU in Tuscaloosa, Ala., echoed the sentiments of many who spoke with Credit Union Journal that the Fed stepping in on interchange is the thin edge of the wedge that will lead to even further regulation of the financial industry. "Essentially this is the government in the middle of price fixing," noted Swofford, not holding out a great deal of hope for the two- tiered system. "I fully expect Walmart and others to water down the two-tiered system as quickly as they can. Their next move will be to try to put caps on credit card interchange using the debit rule as justification."
Wright-Patt's Fecher summed up his CU's stance. "We're putting the interchange fight behind us and returning our focus to what has made us successful over the years. Our success was never based on how much we earn when members swipe a plastic card but rather on how well we take care of those who choose to be members of our cooperative. In the end interchange is a revenue and expense issue to be managed-and we will manage. The bigger picture is that if we continue taking care of people-members and employees alike-we are confident we will always come out ahead."