Two-Tiered Debit System Is Double-Edged Sword

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WASHINGTON – The credit union lobby was hailing provisions of the Federal Reserve’s final rule on debit fees last week, while closely monitoring the exemption for credit unions and community banks as a victory they hope will hold credit unions harmless as fees are capped for the biggest card issuers.

CUNA President Bill Cheney cited the addition of a six-month study, then an 18-month study on the debit rule’s impact on exempt issuers – credit unions and banks with less than $10 billion in assets – as a victory in their lobby to limit the effects on credit unions.

On its face, the exemption will protect credit unions from the most dire provisions of the debit rule – a cap in fees of 21 cents per transaction, down from the current average of 44 cents. That will ensure a continued flow of lucrative debit fees to most credit unions and banks, even as the biggest issuers are forced to slash their own fees.

But credit unions and banks continue to worry about the long-term effects of the higher fees they will be able to charge for debit, potentially driving merchants to the lower-cost cards of the biggest issuers, even though provisions of the Fed’s new rule are aimed at preventing such behavior.

Visa and MasterCard are expected to create a two-tiered system that would cap the fees paid to the big issuers while continuing to allow the smaller issuers to charge higher fees.

CUNA’s Cheney said the trade group is meeting with members of Congress to make sure the two-tiered system is enacted and works as the exemption was intended, even as the Fed was voting the final rule.

The Fed’s Board of Governors all expressed concern about the efficacy of the small issuer exemption. Fed Chairman Ben Bernanke said that current efforts under the Fed’s rule will give regulators “the best shot” in making the exemption effective.

Under the final rule, the Fed will monitor the exemption closely by keeping a list of institutions that fall above and below $10 billion each year and list the average interchange fee by network for exempt banks.


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