WASHINGTON-Though the first 24 months under the Durbin Amendment were not as difficult as many credit unions had predicted, what really has the movement concerned is the next two years.
On the second anniversary of the law, CUs, trade associations and analysts say they are more worried today than they when the Durbin rules took effect.
Blame U.S. District Judge Richard Leon for causing this angst. In July, Leon struck down the new limits on swipe fees, raising a great deal of uncertainty about the future of credit union debit programs and the impact the decision could have on members.
"The per-transaction revenue decline for exempt credit unions in the last two years has been fairly modest," CUNA Chief Economist Bill Hampel told Credit Union Journal. "However, the concern going forward is the world could dramatically change with this court case if things are not decided in financial institutions' favor."
Industry insiders agree that the debit interchange world among most credit unions has not been altered substantially for those below the $10 billion Durbin threshold. Four CUs are above the Durbin carve-out: BECU, Tukwila, Wash.; Navy FCU, Vienna, Va.; Pentagon FCU, Alexandria, Va.; and State Employees' FCU, Raleigh, N.C.
While the effects of the new swipe rules have varied by credit union, industry experts say that collectively CUs have made up for a slight drop in per-swipe-fee revenue-some estimating from 4% to 10%-covering any shortfall with increased transactions.
"When the Durbin Amendment passed, we all were concerned that interchange revenue would plummet. So far that has not happened for credit unions below $10 billion," said Hampel, citing CUNA data through the third quarter of last year and Federal Reserve numbers through 2012. "Growth may have slowed a bit, due largely to PIN network interchange falling. But growth in transaction volume has been sufficient so that debit interchange income has actually risen gradually since the Durbin Amendment."
Market Forces Driving Up Transactions
According to industry analysts, several market forces are driving up transaction volume. They include: new credit union members, many of whom joined because Durbin forced big banks to shed free checking and add fees; CUs employing more debit activation and usage strategies, and consumers' financial habits moving more in line with debit usage.
Michael Moebs, economist and CEO at Moebs $ervices in Lake Bluff, Ill., noted that in 2011, debit transactions among banks, thrifts and CUs totaled 110 billion. He expects the number to rise to 117 billion by the end of 2013. "In 2011, 43% of the debit cardholders were actively using their cards. We are already over 50% and I expect that percentage to rise to 51% by the end of 2013."
Moebs said that FIs should not be overly concerned about debit interchange, and that by the end of this year banks, thrifts and credit unions collectively will post $16 billion in interchange revenue, exceeding the 2012 low of $13.7 billion. (The previous high was $18.8 billion in 2010.) Moebs also predicted that by 2014 FIs will make $17 billion in interchange revenue, and almost $19 billion by 2015.
"In other words, for everything we lost, at a minimum, we will be back to where we were before Durbin," he added.
Industry insiders and analysts recognized that credit unions would have enjoyed higher revenue totals had the Durbin rules not been in place. Madeline Aufseeser, senior analyst in retail banking at Aite Group in Boston, recently completed a study on checking and debit trends. She pointed out that CUs have done very well in the last two years with debit and related accounts.
"The story is that credit unions are going gangbusters and are doing extremely well following the Durbin Amendment's debut in October 2011. "They are growing checking accounts, cross-selling credit cards and achieving greater account penetration. Sure, the Durbin Amendment has cost credit unions money, but overall CUs are doing well in the new landscape."
Greg Smith, CEO of Pennsylvania State Employees CU, Harrisburg, Penn., knows exactly how much the new swipe rules have cost his $4.1 billion CU-$250,000 annually.
"That is on $12 million to $14 million in interchange a year, but our increase in transaction volume has offset that. I'd say it's been a wash. The Durbin rules, to date, have not been as bad as we originally feared. The exemption has protected us, to some degree."
But the $27 billion State Employees' CU, Raleigh, N.C., has not enjoyed that same protection. CEO Jim Blaine said the lower interchange rate takes away $48 million annually from his CU, and that started back in late 2011.
"We thought back then that our transaction volume would double within four years of the new rules," said Blaine. "Therefore, in four years, we would be back to even. We still think the same thing, as long as there is no further reduction in the interchange cap."
What has bothered Blaine most is that the $48 million each year won't be given back to members in the form of better rates or reduced fees. "That money comes straight out of their pockets, because, as we know, the merchants are not giving it back to members with lower prices-the intent of the Durbin Amendment."
No Race To Bottom-Yet
Soon after the Durbin rules took effect, CUs and payments experts expected a "race to the bottom" with interchange rates among PIN debit networks.
That has yet to happen to the extent CUs feared, although the decline in debit interchange, as predicted, has been greatest on the PIN side. The Durbin Amendment's network routing and exclusivity provisions require credit unions to contract with at least two unaffiliated payment networks on their debit cards.
Sources previously stated that the requirement will accelerate PIN networks dropping interchange rates to cater to merchants. Giving merchants more routing options on each card affords greater opportunity to choose the network paying the lowest interchange, allowing retailers to play one network against another. Prior to the Durbin rules the financial institution chose the routing option; now, the merchant does.
Several experts observed that the "honeymoon" with the payments networks is coming to an end, with many lowering interchange rates for those below $10 billion to attract transactions, including efforts by VISA to pull PIN transactions over its signature rail.
Court Case Creates Uncertainty
Of all the developments surrounding debit interchange in the last two years, nothing has created greater stir among credit unions than Judge Leon striking down the new limits on swipe fees.
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 must 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.
The Federal Reserve Board has appealed the ruling and Leon has agreed to keep in place the 2011 Durbin guidelines while the D.C. Circuit Court of Appeals reviews whether the Federal Reserve violated the intent of Congress in setting the rules.
Insiders and analysts say that if the current interchange rate is cut in half-as many believe will occur-that large difference between the exempt and non-exempt banks and CUs will become too great for payments networks and merchants to ignore. Merchants will quickly begin finding ways to encourage networks to drop their interchange rates for exempt FIs.
But several experts, including Stan Hollen, president of CO-OP Financial Services in Rancho Cucamonga, Calif., fear another aspect of the court ruling most-network routing and exclusivity. Instead of two unaffiliated networks required on debit cards, that number could climb to four, based on Leon's ruling.
"That really throws things up in the air," said Hollen, who said the additional routing options give merchants too much choice in choosing the least-costly route. "Think about it. Before the Durbin Amendment took effect, there were maybe 12 merchants that looked to route transactions over the least costly route and had the technical capability to make those decisions. Now there are hundreds and hundreds of merchants that can do this, and want to do this."
CUs Winners With Lower Interchange?
Yet a few analysts have proposed that if the current interchange rate is cut in half, credit unions below $10 billion will continue to win more members as banks add more fees and adjust checking account pricing to make up for the revenue drop-Aite's Aufseeser is one.
"If interchange goes down as a result of this latest court ruling, virtually all credit unions will benefit big time," she said.
CUNA's Hampel disagrees. "It sounds good, but I am not quite sure that will happen," he noted, saying that the significantly higher interchange rate most CUs would enjoy would be "short lived" as merchants would quickly force networks to cut price.
But Moebs sees a brighter future for all FIs, saying that consumers have fallen in love with their debit cards and the trend for transaction volume climbing will continue and offset any additional swipe fee cuts. "Consumers are hoarding cash due to the economy. What has been the best vehicle to manage their spending and their cash-debit."
Despite CUs having managed well through the last two years under Durbin, debit represents a significant portion of net income. "Credit and debit interchange accounts for 65% of our net income," said PSECU's Smith. "If debit interchange would fall significantly a lot would have to change at our credit union."
Carrie Hunt, SVP of government affairs and general counsel at NAFCU, said the trade association is concerned about those tough decisions facing CUs if the interchange revenue were to decline sharply.
"I think there is more uncertainty now than there was right after the Durbin rules were passed. Our big concern is the court case . . . Any big change in debit revenue could have a significant impact on credit unions. We have raised this issue with NCUA to make sure they are aware of everything that is going on with debit to be certain there are no safety and soundness concerns for credit unions."
