LOS ANGELES-While most industry analysts see debit interchange only shrinking this year, some suggest there are forces at play that could keep interchange close to levels credit unions currently enjoy.
Robert York, CEO of the $108-million California Bear CU, believes actions by retailers could prompt the Fed to take a fresh look at debit interchange and possibly raise the cap for regulated institutions, a move that would only help to preserve CU debit revenue.
York referred to the lawsuit brought by a group of retail associations and retailers against the Federal Reserve that challenges the new debit interchange cap, as well as a study from the Electronic Payments Coalition that shows major retailers, on average, have raised prices following the new interchange guidelines taking effect Oct. 1.
York said the Electronic Payments Coalition report, titled "Where's the Debit Discount?" asserts merchants are not passing debit interchange savings on to consumers. The study based its findings on research conducted at national chain retailers in six U.S. cities, finding consumers paid 1.7% more, on average, for the same items in stores after the debit cap was put into effect than they did before.
"Originally I thought interchange tables would collapse and eventually regulated and un-regulated rates would blend together," said York. "But as long as the retailers keep shooting themselves in the foot, I think our advantage could go on for a much longer time."
York contended the Fed, which can revisit interchange guidelines every 12 to 18 months, could decide to bump up the cap as a result. "The Fed may choose to send a message to retailers that they are not living up to their end of the bargain. I would not be surprised if they bumped up the cap five to 10 cents."
Cap Hike Downplayed
Mary Dunn, CUNA SVP and deputy general counsel, agreed the Fed has the ability to review the interchange cap, but she does not hold out hope for a cap hike. "The Fed can revisit the cap. While we would encourage that, it's going to be an uphill fight unless we can provide substantial evidence that retail prices have gone up and consumers are being gouged."
Dunn said the better bet is to show increased fraud costs that need to be recovered. "Whenever there are reasonable and legitimate reasons to look at debit interchange, we will encourage the Fed to do that. But we have to be careful about expectations, because the retailers have a lot of clout in Congress. Face it, they are the ones who got this debit cap established."
But it isn't just the actions of the retailers that could potentially boost interchange revenue, according to the $3.8-billion Pennsylvania State Employees CU in Harrisburg, Penn. Card Services VP Tom Ruback said efforts by Visa to preserve transaction volume by encouraging merchants to route PIN transactions over their signature rail will add to CU coffers.
"If Visa can convince merchants to select their network under the network exclusivity provision of Dodd-Frank, then the PIN POS transactions would route via the Visa signature network but at the higher signature interchange rate in the case of FIs under $10 billion in assets," said Ruback. "So the 31-cent transaction, the average for a PIN swipe, becomes 41 cents, adding to our revenue."
