Small Talk: It's Not the Large FIs That Are Speaking Up

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WASHINGTON — In a rule-making process turned upside down, credit unions and community banks that are exempt from the Federal Reserve's proposal controlling debit interchange fees are dominating the comment process, while the big institutions coming under the rule have yet to weigh in.

But the majority of comments by credit union representatives, who make up as much as half of the 140 comments submitted to the Fed so far, are concerned the rules applied to banks and credit unions with more than $10 billion in assets will profoundly impact the revenues they now earn from debit transactions.

"Even though as an issuer technically exempt from provisions of the regulation, I am concerned that the imposition of the rule with the proposed revenue caps will have a negative impact on all debit card issuers," wrote Mark Sadowski, chief financial officer at Lacamas Community CU. "In the absence of enforcement of the small issuer exemption, there is little doubt that small issuers would be forced to accept significantly lowered revenues as well."

James Holt, president of Mid American CU, told the Fed he is worried that the Fed's proposal to slash interchange on transactions mediated by large institutions will end up affecting those at smaller credit unions and banks. "The proposal as written does not include provisions to ensure the small issuer exemption," he wrote. "Please use your authority to ensure that there is some way of enforcing what Congress intended."

"I work for an institution with less than $10B in assets but this Amendment WILL negatively affect us and hurt our membership," wrote Jim Johnson, vice president, member services, for 3 Rivers FCU.

"We are especially concerned that there are no provisions in the proposed rule that enforce the anti-discrimination provisions in the law," added Johnson, referring to requirements that merchants not discriminate against higher-fee cards offered by exempt organizations. "We are worried that merchants face no penalties if they discriminate against the use of debit cards by consumers using cards issued by small issuers."

"Even if a two-tiered system is permitted and works in practice," wrote Barbara Lockard, chief operating officer at Partners Financial FCU, "small issuers will be disadvantaged if the provisions on routing and exclusivity that allow merchants to choose how debit card transactions are processed are not implemented properly."

The comments are coming as Visa has announced it plans to establish a two-tiered system for debit interchange, separating transactions for the biggest institutions that will be covered under the rule from the smaller exempt credit unions and banks. But industry leaders have expressed concern this week that the two-tiered system will be unworkable and that the lower fees ordered for the big institutions will either force the smaller institutions to lower their own fees or drive more transactions to the lower-fee cards offered by the big institutions covered under the rule.

Most credit union commentaries doubted that cuts in interchange will accrue to consumers-as Congress intended. The proposal, wrote Lourdes Ruano, chief financial officer at SkyOne FCU, "will have a negative impact to financial cooperatives such as SkyOne Federal Credit Union while having no positive impact to consumers. The intent of the reg was to help consumers but instead it will only benefit merchants."

"The proposed limitations on interchange fees are an ill-advised overreach by the Federal Reserve Board with no real benefits to consumers," wrote Terry J. Katzur, manager of ELGA CU. "The only benefit will be to the retailers at the expense of financial institutions and the consumers. This is a transfer of revenue that will not lead to a reduction in prices at the retail stores, but will lead to increased profits for retail giants like Walmart. Any perceived benefit to the consumer is highly unlikely."

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