WASHINGTON-Debit interchange is under attack again as a federal judge last week struck down the new limits on swipe fees, raising concern about the future of credit union debit programs and the impact the decision could have on members.
U.S. District Judge Richard 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. The ruling means the Fed will likely be required to return to the drawing board to set a lower cap for debit fees to be paid to credit unions and banks over $10 billion in assets.
"This decision will have a potentially devastating impact on the ability of small debit card issuers, particularly credit unions, to continue offering this vital payments service to their members and customers," said Eric Richard, general counsel for CUNA. "The decision will, no doubt, challenge credit unions to continue their debit card programs without incurring drastic cuts in revenue, or imposing additional fees on their members-the last thing credit unions want to do."
Carrie Hunt, general counsel for NAFCU, said the court's ruling will have an "irreparable, detrimental impact on credit unions' ability to ensure their members receive the services they need."
Jim Blaine, CEO of the $27 billion State Employees' CU, Raleigh, N.C., summed up how the Durbin rules have already impacted his credit union, and shared a great deal of concern about what a potentially lower cap would mean to the membership. "When we went from 44 cents to 21 cents, that cost our organization $40 million annually. That money comes straight out of our members' pockets [in terms of loan and deposit rates]. I would not gripe about any of this if retailers lowered their prices, the supposed intent of the Durbin rules. But that has not happened."
At BECU, Tukwila, Wash., Tom Berquist, SVP of member strategies, shared similar concerns for the $11.5-billion CU's membership. "It's too early for us to determine exactly what the impact could be to our members. However, any decrease from the current interchange level would certainly affect the value BECU returns to our members."
'Race to the Bottom'
According to several sources, just as worrisome as a lower cap is the part of the court ruling concerning the Durbin amendment's network exclusivity provisions that will likely require credit unions to contract with at least one more debit network. Under the current Durbin rules, all FIs must have two unaffiliated payment networks on their debit cards.
Stan Hollen, president of CO-OP Financial Services, Rancho-Cucamonga, Calif., believes that could accelerate PIN networks dropping their interchange rates to cater to merchants, often termed the "race to the bottom." Giving merchants more routing options on each card gives them greater opportunity to choose the network paying the lowest interchange. "Merchants want multiple networks on each card to play one network against another."
The trickle-down effect of lower swipe fees to FIs below $10 billion, which has CUNA concerned for the entire CU industry, is something on the radar of a number of card processors. Hollen reported that CO-OP CUs have seen as much as a 10% drop in debit interchange post-Durbin but that many have made up the shortfall with additional volume generated from new members and increased transactions.
'Potential Continued Risk'
PSCU, St. Petersburg, Fla., reported that it has seen interchange rate compression for credit unions below the $10 billion threshold. "With this recent ruling, there is potential continued risk of further indirect impact to exempt issuers, especially since there are no rules that force the networks to comply," said a company spokesperson. "If the interchange bar is ultimately lowered for non-exempt financial institutions, there could be incremental pressure to bring rates down further for the exempt issuers. But it is too early to speculate."
CSCU, Tampa, Fla., has seen declines in exempt CU debit interchange from 4% to 6% from pre-Durbin levels. "That certainly is cause for concern that additional reductions in the cap for covered issuers will have some detrimental impact to interchange rates for exempt issuers as well," said Barney Moore, senior portfolio consultant.
Last week's ruling is based on a suit filed by the National Retail Federation, the Food Marketing Institute and NACS, formerly the National Association of Convenience Stores, as well as a number of other retailers.
