Visa To Set Two-Tiered Interchange Schedule

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SAN FRANCISCO – In an effort to satisfy thousands of credit unions and banks, Visa on Friday said it will develop a two-tiered system of debit card interchange to help in the implementation of the price controls required under the Dodd-Frank Act.

The system will include one tier for credit unions and banks with more than $10 billion in assets, as required under Dodd-Frank, and one for all those under the $10 billion threshold. “We have said that we will support a two-tiered debit interchange structure,” a Visa spokesperson said in a statement late Friday.

The establishment of a two-tiered system comes as a growing number of credit unions are calling on the Fed to include such a fee schedule in developing the price controls and rules for Dodd-Frank. The Fed has proposed cutting interchange fees on debit transactions by as much as 70% to an average of 12 cents per transaction.

Interchange on debit transactions, just as on credit, has become a major source of income for credit unions – as much as $2 billion a year of the $5 billion in interchange accruing to credit unions, and growing rapidly.

Visa’s decision was widely expected in the industry, where thousands of Visa and MasterCard issuers will not come under the Fed’s interchange price controls. MasterCard is expected to follow suit and create its own two-tiered system but said Friday it has not made a final decision. “MasterCard is continuing to evaluate the viability of a two-tier interchange structure for debit and excluded products,” the company said Friday. “We will be thoughtful and comprehensive in our analysis of this issue. We believe it is not prudent to make such a decision in advance of knowing all the facts.”

Randy Beck, executive vice president of Eau Claire, Wis.’s Royal CU, said even though Dodd-Frank exempts smaller institutions from the price controls, he is concerned that the absence of a two-tiered pricing system offered by Visa and MasterCard will cause the exempt institutions to be impacted under a single-tier system  “I realize there is an exemption for financials who are under $10 billion in assets, but it remains unclear as to whether the networks will develop and support two different levels of interchange,” said Beck, in a comment letter submitted to the Fed on the proposal.

“We are concerned that the proposal does not include provisions to enforce the small issuer exemption,” wrote Jack Ewald, president of UHS FCU in Johnson City, N.Y. “We urge the Fed to use its authority to reinforce the small issuer exemption and ensure that it works as Congress intended.”

“The proposed debit interchange rates also concern us, especially if the establishment and maintenance of a two-tiered structure cannot be assured,” wrote Cheri Spencem chairman of Entrust FCU in Richmond, Va.

Under a two-tiered system, only three credit unions that have more than $10 billion will be in the top tier and come under the Fed’s price controls. All other credit unions would be in the second tier.

Visa’s commitment to a two-tier schedule comes even though its executives have indicated such a structure would be difficult to implement operationally. In its statement, Visa said it “has committed to helping our clients navigate the current regulatory environment and determine how best to plan for an uncertain future and move their business forward. It’s important to remember that the Federal Reserve hasn’t finalized its recommendations and that there are numerous issues that must still be clarified and addressed. Nevertheless, we continue to actively engage our clients to provide Visa’s perspective on the debit provisions and to address our clients’ specific questions.”


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