Debit Fees Feed CUs
WASHINGTON – Revenues earned by credit unions from debit card interchange is far more than was previously thought – an estimated $2.6 billion for 2010 – according to CUNA, which is preparing testimony for tomorrow’s Congressional hearing on interchange legislation.
That figure is more than half of the estimated $4 billion in net income credit unions earned in 2010, and greater than what credit unions now earn from credit card transactions, according to CUNA’s chief economist Bill Hampel, who helped compile the new data. That’s because more credit union members conduct transactions using debit/check cards connected to their credit union checking accounts than use their credit union’s credit card, he said. Hampel noted that many credit union members use credit cards issued from other institutions, typically big banks, while the vast majority have checking accounts that often are tied to debit cards.
Earlier studies estimated that credit unions earn about $1.5 billion to $2 billion a year in debit fees.
The growing reliance on debit revenue will be emphasized tomorrow when Frank Michael, president of Allied CU in Stockton, Calif., testifies before the House Financial Services Committee on the debit interchange proposal being crafted by the Federal Reserve.
CUNA data shows that about 72% of all credit unions currently offer a debit card, with 85% of all large credit unions, those over $100 million, offering debit.
The study makes some assumptions about loss of revenues if the Fed’s proposal to cut interchange fees is enacted. If fees are cut to as little as 12 cents per transactions – as is being proposed for the biggest banks – it would reduce credit union revenues by an estimated $1.6 billion a year because they now earn an average of 32 cents per debit transaction. That is a worst case scenario.
The CUNA study noted several variables being considered, including the fact credit unions with less than $10 billion in assets are supposed to be exempt from the fee cap, that industry leaders are discussing creation of a two-tiered fee system, and even with a two-tiered system, merchants could choose to steer transactions to lower-cost card issuers. Hampel also noted the market forces that would begin to move pricing toward lower fees. “It’s incredibly unlikely that the fees for small institutions are going to remain the same,” he told Credit Union Journal yesterday.
“Even if we conservatively estimate that after the passage of a few years, the effect on the debit interchange regulation is only half the reduction to be experienced by larger institutions, the effects would be substantial,” the CUNA study found. At 2010 volumes, net income would fall by about $800 million or 9 basis points of assets. As a proportion of total net income, the loss would be almost 20% at current net income rates, and almost 10% if and when net income reaches pre-recession levels. “Even with this much less severe effect, the annual loss to credit unions would be about the same as the amount they will be required to pay annually for the Corporate Stabilization Fund while it is in existence.”
According to CUNA’s 2010-2011 Fee Survey of 1,200 credit unions, most credit unions (91%) offering check cards anticipate they’ll make some sort of change to their rates, fees, and/or services as a result of the negative impact of the regulation. The most common changes credit unions anticipate making will be to introduce or increase debit card fees and to increase nonsufficient funds (NSF)/overdraft protection fees. Beyond this, 25% to 30% of credit unions say they might eliminate free checking accounts and/or lower deposit rates as a result of the regulation.