RANCHO CUCAMONGA, Calif.-The new year brings new scrutiny to how long the debit interchange window of opportunity will remain open for credit unions.
Analysts and CU leaders agree the higher interchange rate institutions below $10 billion in assets enjoy over most banks-the results of the Durbin rule-will begin moving closer to the regulated cap of around 24 cents in 2012. Yet they disagree on when CUs will see a real change and how much change will come this year.
Stan Hollen, CEO of CO-OP Financial Services, says the window is already closing, citing a survey of 20 of CO-OP's largest credit unions that showed the group, overall, has already experienced a 5% drop in debit revenue. Hollen attributes the dip to Visa and MasterCard raising the interchange rate in October 2011 for small-ticket purchases, which, in turn, has merchants discouraging use of debit for small items.
While Hollen said CO-OP believes credit unions will still maintain an advantage over the big banks for an extended period of time, by the end of May he expects debit interchange will be down 20% year over year. Under the new interchange guidelines, financial institutions are expected to have at least two qualified unaffiliated networks on their debit cards by April 1, 2012. That deadline will likely increase PIN network competition as prices are reduced to grab share of merchants' business, especially after April 1, sources suggest.
Hollen said 5% of the reduction will come as a result of Visa and MasterCard's pricing change for small ticket items and the other 15% from PIN networks lowering interchange. What is also spurring competitive activity in the PIN arena is Visa's efforts to grab much more share of PIN transactions.
"Visa has approached around 50% of the largest retailers about routing PIN their way over their signature network," said Hollen. "We also think there will be some additional pressure from large-box merchants to try to get the PIN POS networks to reduce their fees."
Jeff Rosenbeck, director of card brands, EFT networks and analytics for the St. Petersburg, Fla.-based PSCU Financial Services, is not as certain as Hollen about when the 20% drop will arrive, but it's coming this year, he told Credit Union Journal. "PSCU still believes we are looking at a 20% compression in interchange revenue against mid-2011 levels for un-regulated issuers. I think we could see a race to the bottom by PIN networks in certain merchant categories," Rosenbeck said. "I think we will know in about four moths, as pricing actions in the April timeframe will tell us more. We could see PIN networks come out slowly with their changes, almost a game of chicken, and then see things accelerate."
Card processors are advising credit unions to keep no more than one PIN network on their cards to limit merchant ability to route through the least-cost provider, and to gain a strong understanding of the direction in which their network business partners are heading (
An Interesting Development
Jeff Russell, senior advisor for The Members Group in Des Moines, Iowa, pointed out an interesting situation is developing in which credit unions will work with their PIN networks to preserve interchange while networks are wooed by merchants. "I think 2012 will be a cat-and-mouse game as to who will figure this out."
Adding to credit union worries are merchants playing games, steering consumers away from higher-interchange debit cards. Robert York, CEO of the $108-million California Bear CU in Los Angeles, reported that two merchants already asked a few of his members and employees to put away their credit union debit card in favor of a "bank card."
"It was a movie theater and a fitness club asking our cardholders not to use their card due to the cards being within 30 days of their expiration date," York said. "Whether intentional or not, that is steering. I believe it was intentional."
NAFCU President Fred Becker said he received a report from a credit union CEO who said his debit portfolio has already been affected by merchant steering. "We have long anticipated that the drop in debit revenue would be an incremental process, not a singular event. NAFCU speculated it would not begin until this summer until we saw some change. Apparently not. A credit union CEO informed me he is seeing retailers take action, asking for cash or credit, sometimes refusing to take debit. He said his debit interchange revenue, not transactions, has gone down 9%."
Merchants Have No Choice
Some CEOs are seeing big-box merchants avoid interchange altogether using ACH (see related story). But Bill Hardekopf, CEO of LowCards.com, Birmingham, Ala., insisted some of the small merchants have no choice. "The higher interchange now on small-ticket purchases is killing the small retailer who relies on the three-dollar cup of coffee. Some of these merchants are dropping debit altogether."
Mary Dunn, CUNA SVP and deputy general counsel, said not enough time has passed since the Durbin rules took effect Oct. 1 to make any predictions about 2012. "I think the end of this year is when we will have a clearer picture about the future of credit union interchange. There are a lot of irons in the fire right now that could influence how things turn out."
The biggest concern, Dunn believes, is a lawsuit brought by a group of retail associations and retailers against the Board of Governors of the Federal Reserve challenging the new interchange cap. "I think this is the biggest unresolved issue on the horizon," said Dunn, noting CUNA will follow the suit closely.
TMG's Russell summed up 2012 as a watershed year for debit interchange.
"It's an interesting time because we are right in the middle of things that are changing rapidly. The marketplace is trying to adapt to the new interchange rules and the next 12 to 18 months will probably set the stage for interchange for the next decade."
