Credit Unions Feeling The Squeeze On Income As Result Of Card Settlement

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Executives throughout the credit union movement are anxiously awaiting word on how the two major card issuers, Visa and MasterCard, will configure their pricing structure for debit transactions for next year.

Those executives are still tallying up the costs of the $3-billion settlement between the two card giants and retail merchants, which resulted in a third less interchange fees for signature-based debit transactions from Aug. 1 to the end of the year, slashing credit union income by millions of dollars.

"It's lowered our interchange income quite a bit," said Scott Mainwaring, chief financial officer for VyStar CU, Jacksonville, Fla., who estimated the $2.6-billion credit union will lose as much as $500,000 in fees on its Visa Check Card program this year. "When you lose 29% to 30% of that line item (interchange fees) for the last five months of the year, that's quite a bit."

"There's been a lot of concern about it. As far as I know, everybody is going to lose some money," said Bruce Beaudette, president of Sunmark FCU, of the conversations at the recent New York State Large CU Roundtable. He estimated the cost to the $275-million Schenectady, N.Y., will be around $170,000 in lost fee income on its Visa MoneyCard debit program this year.

Under the settlement, Visa and Mastercard agreed to pay $2 billion and $1 billion, respectively, to affected merchants, and to reduce the fees charged to merchants on all signature-based debit transactions by a third for the last five months of the year. That meant a third less income on those transactions for credit unions and other issuers that share the merchant charges. And despite the fact Visa and MasterCard are supposed to announce new pricing for 2004, many observers believe the lower fee structure will prevail. "I think it's going to look very similar in pricing in January," said Mainwaring.

As credit unions rely more on non-interest income, and 65% of all debit transactions are signature-based, this has caused a major hit for some credit unions. Data compiled by Callahan & Associates shows that fee income, and especially interchange fee income, has made up increasing portions of operating revenues for credit unions over the past few years. Since 1998 non-interest income has increased from 10% of total revenues to 15% in 2002, with as much as 18% of that non-interest income coming from interchange fees.

Income from VyStar's debit program, for example, has grown by 20% to 25% a year the past five years, according to Mainwaring.

In another example, Coastal Federal Credit Union budgeted $2.1 million in interchange income for 2003, 14% of total fee income. With the five-month reduction in fee income estimated at $250,000, that translates into a 12% reduction in fee-based income for the $1.5-billion credit union.

"While we took some gooseeggs on this to the tune of a quarter-million dollars, we're confident it's not going to be a negative windfall in the long run," said Ralph Reardon, chief financial officer of Coastal FCU, who is anxiously awaiting an announcement from Visa as to what the new pricing structure will be for 2004.

Officials at Visa and MasterCard said they are not ready to discuss what the new pricing will be in January, but industry observers say the market will play a bigger role under the terms of the settlement, which will allow individual merchants to strike their own deals with the card giants, one of the main goals of the antitrust action.

Meantime, credit union executives are trying to cope with the lost fee income. "I've been very interested in this-$170,000 is a lot of lost income," said Beaudette, "But unless you're going to pass it on to members there's not a lot you can do."

Coastal FCU hopes to make up some of the lost fee income by encouraging greater use of its cards to increase the volume of transactions for its Check-IT Visa debit card. "We're doing some things in the fee-based area," said Reardon. "On the card side, we're trying to enhance the feel and the look of the card. We're trying to make our card an integral part of some of the high-tech, high feel branches we're opening."

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