CUs, Banks On Same Page On Interchange Issue

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WASHINGTON-Traditional enemies credit unions and banks will mount a joint lobbying campaign this week as Congress weighs their pleas to save the lucrative revenues they earn from debit cards.

A credit union executive, Frank Michael, president of Stockton, Calif.'s Allied CU, and a bank executive, David Kemper, president of Commerce Bank in St. Louis, sought to convince lawmakers during a hearing last week that proposed cutbacks in debit interchange rates will so harm the industry it will pose new threats to the already tenuous recovery (see related story).

Closely held information now emerging shows how valuable the growing earnings from debit cards are for both credit unions and banks, who will earn an estimated $20 billion in debit fees this year-some $2 billion of it going to credit unions. Credit union and bank representatives told the Federal Reserve the Fed's controversial proposal to cut debit fees could mean the difference between the red and the black for many of them.

Wisconsin's Royal CU, for example, earned $4.1 million from debit interchange last year; California credit union giant Star One CU earned $1.3 million; Belvoir FCU $3 million; Ohio's DayAir CU $900,000; First Trust CU in Indiana $359,000; Community Family CU $676,200; and R-S Bellco FCU $50,400.

Debit Vs. Credit

Showing the rapid growth in debit versus credit card transactions, Colorado's Ent FCU said its 113,000 debit card holders made 44 million transactions last year, earning the $3.5-billion CU $10.1 million in total interchange, which, after $3.7 million in expenses accrued for the program, came out to a net of $6.4 million. The net income, according to Randy Bernstein, a senior executive with Ent, "represents 35% of our projected 2011 net income."

William Burke, president of Day Air CU, projected that the Fed's proposed cap on interchange fees-which most observers believe will be hard to separate for smaller, exempt credit unions and banks-will cut deeply into the Dayton, Ohio CU's earnings.

"The resulting loss of revenue equates to approximately one half of the credit Union's total net earnings," Burke told the Fed.

The potential loss in revenues could have dire effects on smaller credit unions, according to comment letters.

"We currently spend about $5,500 to process debit transactions and recover about $4,200 from debit interchange monthly," wrote William Wehr, Jr., president of R-S Bellco FCU, a $22-million New Brighton, Penn., credit union. "A reduction in interchange to 7 or 12 cents, as proposed, would increase monthly program cost by $3,000 to $3,500. This represents about the cost of one of our nine full-time employees."

"Alternatively, we would have to identify other revenue sources to replace the loss. Discontinuing the program by dropping debit cards access to share draft (checking) accounts would akin to selling pizza without toppings," wrote Wehr. "You might have some customers, just not enough to stay in business."

The credit unions' view is closely aligned with that of the community banks, which also feel it will be difficult to design a two-tiered system that will implement the interchange cuts for credit unions and banks with more than $10 billion in assets, as required under the Dodd-Frank bill, and leave the smaller institutions unscathed.

A Lose-Lose

"We will either lose our customers to the larger institutions or the industry will adopt one interchange rate. I think the latter will become the rule," wrote Robert Snyder, president of the $280-million Luzerne Bank in Pennsylvania. He said his bank earns $138,000 in net income from debit card interchange and would be left in a loss for the program if the Fed's proposed cuts are enacted.

First Bethany Bank in Bethany, Okla., said its $155,744 in interchange income was reduced after expenses for the program of $111,612, to a net of just $4,132. After accounting for a fraud-related loss of $8,028, the net for the year for the debit card program was just $36,104.

"If our interchange income is drastically reduced we will no longer be able to offer this product to our customer at no charge," CEO Jane Haskin wrote in her comment letter to the Fed.

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