PHILADELPHIA-Several days before the new debit interchange guidelines took effect, Visa and MasterCard were reportedly making a move to counter some of the impact of the Durbin rules, planning to raise fees merchants pay on small-ticket purchases.
If those changes take place, the move would likely prompt merchants to respond by declining the use of debit for small tickets or add a minimum for small purchases, affecting financial institutions' debit volume.
However, while concerns were raised by CU CEOs on and off the record, the change by the world's two largest payments networks will have little or no impact on credit unions below $10 billion in assets, two sources contended. The Durbin rules took effect Oct. 1.
Thomas McCrohan, an analyst with Janney Capital Markets, told Credit Union Journal that Visa and MasterCard planned to increase the fees merchants currently pay for small-ticket debit purchases in favor of an amount equal to the Federal Reserve's debit interchange cap for institutions above $10 billion in assets. That would mean merchants would pay 23 cents, instead of about eight cents, on the purchase of a $2 cup of coffee.
McCrohan said he was informed by reliable sources that the two payments networks were planning to eliminate the small ticket interchange rate. "I am hearing they will eliminate that category all together, which implies that small-ticket transactions will default now to the 23-cent regulated cap."
There was debate over whether Visa and MasterCard would make the change across the board-for institutions above and below $10 billion-or just for those over the exemption cutoff. However, one individual close to Visa and who asked for anonymity told Credit Union Journal the payment network planned to make the change and implement the new structure only for institutions above $10 billion, which would appear to leave all but three credit unions unaffected.
Excitement 'Overstated'
In St. Petersburg, Fla., PSCU's Jeff Rosenbeck, director of debit, ATM, and prepaid services, concurred, and also told Credit Union Journal that the "excitement around this may be a little overstated. For our member base, small-ticket transactions only make up 6% to 8% of all signature transactions."
Visa and MasterCard have not commented on the reported fee structure change, but have stated they plan to change interchange fees on debit cards in response to the Federal Reserve's rules finalized in June and mandated by the Dodd-Frank Act. Last week Visa did not return calls from Credit Union Journal and a MasterCard spokesperson simply stated the payment network planned to institute the two-tiered payment system.
If put into effect, a move by merchants to implement a minimum purchase amount or to decline the use of debit for small purchases will only drive consumers to cash and possibly checks for low-cost purchases, industry observers agreed. More activity could go to credit cards, as well.
Bill Hardekopf, CEO of LowCards.com in Birmingham, Ala., believes if the payments networks make the change, merchants will require consumers to spend probably at least $10 to use a debit card. "We are such a cashless society it is hard to imagine people beginning to carry more cash, but they will have to."
Potentially Affecting Volume
Evan Clark, CEO of the $258-million Department of Commerce FCU in Washington, sees the change as possibly affecting CU debit volume. "The potential impact on our programs is that members could potentially stop using their debit cards as much thereby dropping, even further, our interchange income," said the CEO, who had no stance on whether the payments networks' purported move would include institutions below $10 billion. "It's really tough to judge the overall impact until the rubber meets the road, the new fee is charged, and we see the reaction of merchants and then our members."
McCrohan believes small mom-and-pop merchants will be affected the most, not having the clout to work with Visa and MasterCard on a separate payment schedule. "It is my understanding that some of those big merchants that are small ticket have a contractual rate (with Visa and MasterCard) that could be different from the public rate schedule. I don't think we will go to McDonalds and suddenly they won't take debit or the minimum purchase will be $10."
Sources suggested that the potential move by the payments networks could be in response to bank requests to generate more income to make up for the dramatic cut to debit interchange revenue, or a move by large financial institutions to shift more consumers to credit cards, which receive higher interchange.
"I don't know what the banks are thinking," surmised McCrohan. "But I would suggest they were saying that if the cap goes into effect they are not interested in the small transactions, that there is not enough in them anymore."
Starting To See The Consequences
Before the Durbin rules were close to final, credit union executives, card processors, and industry observers warned of the unintended consequences of the new interchange rules. "Now we are starting to see them," said McCrohan. Sources suggested that for the next several months the payments networks, merchants, and financial institutions will go back and forth until an equilibrium sets in, and what will happen as a result of the give-and-take cannot be predicted.
Jim Park, president and CEO of CU24 in Tallahassee, Fla., said the Durbin rules are creating chaos within the financial industry. "We stated a long while ago that these rules were pushed through without thorough understanding and not enough time was given to them. Put those things together and you see what happens. I am saying these rules hurt everyone-the banks, credit unions, payment networks, merchants, and consumers. Maybe someone will benefit, I just don't know who."
