WASHINGTON-Not only is the future of debit swipe fees in question, which by itself is raising a great deal of concern among credit union CEOs, but now some CUs may be on the hook to reimburse merchants.
Last Wednesday, U.S. District Judge Richard Leon gave the Federal Reserve tight deadlines for coming up with interim regulations to replace the current Durbin amendment caps, admonishing the Fed for what he sees as foot-dragging on new rules to set debit fees under the law.
The judge also raised the issue of FIs above $10 billion in assets reimbursing merchants for "excessive" swipe fees (see related story, page 10).
For one CU that could mean about $36 million, on an annual basis, since the Durbin rules took effect.
In late July, Leon ruled the Federal Reserve flouted Congress' intent when it set the current 21-cent cap, allowing additional expenses, such as fraud costs, to be calculated into the cap total, charging the Fed to return to the drawing board to set a lower cap for debit fees to be paid to CUs and banks over $10 billion in assets.
CU leaders have told Credit Union Journal that any additional significant reduction in interchange revenue, particularly for those above $10 billion in assets, will have a direct impact on the membership-likely resulting in higher loan rates and lower deposit rates. Those below $10 billion fear the "trickle down" will speed up significantly if the cap rolls down to 12 to fourteen cents, which many fear may happen.
'Could Have Big Impact'
Jaime Crooks, marketing director at the $50 million Ohio HealthCare FCU, Dublin, Ohio, said her CU has already felt the pinch from the Durbin rules rolling down. The recent court decision now has OHCFCU "focusing heavily on additional revenue sources. I know nothing is final yet, but this could have a big impact on all credit unions. We are also examining all areas of the credit union for ways to offset any additional reduction in interchange."
Jeff Disterhoft, CEO of the $2 billion University of Iowa Community CU in Iowa City, expressed frustration about what the Durbin rules have failed to accomplish and what the courts may be doing now. "What people don't understand is that eliminating those 'inflated' fees will invariably result in an increase in fees or detrimental pricing elsewhere. The financial services industry needs some level of earnings to build and sustain capital. So adjust the mechanism if needed, but don't think for a minute that consumers or business will ultimately see a lower cost for their banking services."
New Concerns
But after last week's hearing what raises further concern among a small group of credit unions above $10 billion in assets is the possibility of the large financial services providers reimbursing merchants for excessive interchange fees. The judge gave the Fed and attorneys for retailers, credit unions and banks a Sept. 16 deadline for briefs on whether merchants should be reimbursed for excess amounts of swipe fees that have been collected since the Durbin cap took effect in October 2011. There are currently four credit unions coming under the cap's threshold: Navy FCU, State Employees' CU (North Carolina), Pentagon FCU and BECU, with SchoolsFirst FCU in California poised to join the $10 billion club.
"This is a large-scale matter affecting millions of entities and billions of dollars," said Judge Leon, who struck down the 2011 Fed debit caps because he found they were too favorable to card issuers and Visa and MasterCard. While credit unions, banks and card firms could fight any type of reimbursement effort, it could be a windfall for merchants, who could regain millions of dollars or more if such a push was successful.
Leon has asked lawyers from both sides of the case to come up with ways to make financial services companies reimburse businesses for what he called "overcharges." That would be the difference between what the Fed's swipe fee limits have been since Oct. 1, 2011, and what they should have been based on the Durbin amendment requirement that debit fees be "reasonable and proportional to the cost incurred by the issuer."
SECU's Potential Tab? $2.8M
Jim Blaine, CEO of the $27 billion State Employees' CU, Raleigh, N.C., ran the numbers and said if SECU were asked to give back to merchants, it could come to $36 million a year, annualized, "for each year the swipe fees have been 'wrong,' as the judge explained. We made $5.7 million annually on debit interchange with the fee at about 24 cents. Cut that to 12 cents and our revenue would have been $2.9 million annually. This mess is being billed as financial institutions versus retailers, but actually the consumer is getting killed. And since we are a cooperative our members really lose. They pay the same prices at retailers and get lower benefits at the credit union."
Many say it is still too soon to predict what will transpire-will the Fed challenge the ruling and what could interim rules be. But it is clear that Judge Leon wants to get the matter resolved quickly. Wednesday he said he expects interim regulations to replace the current Durbin amendment caps to be completed by the end of October, and that they should go into effect while comments are accepted and reviewed. The judge scheduled a hearing for Aug. 21 for the Fed to state its position on the proposal and to say how soon interim regulations could be put in place.
'Major Piece of Earnings'
Too, this ruling now calls for more routing competition, not only in PIN debit, but signature as well. Sources have stated that this could ultimately have the quickest impact on the majority of CUs, hastening PIN networks, and now signature networks as well, dropping their interchange rates to cater to merchants. "This is a serious issue, said Henry Wirz, CEO of the $2 billion SAFE CU, North Highlands, Calif. "Our debit interchange revenue is $10 to $11 million annually and that represents 25% of our noninterest income-a major piece of our earnings."
Wirz is concerned continued downward pressure on interchange could force many credit unions to rethink checking account structure and pricing, passing on more of the program's costs to members.
Last month's ruling was in a lawsuit filed by a coalition of trade groups representing very retailers after the new limits went into effect Oct. 1, 2011, saying the financial services lobby pressured the Fed into allowing higher fees than the law intended.
