With Durbin Pending, No Plans To Add New Fees-Yet
HARRISBURG, Penn.-One week following the defeat of a bill to delay the Durbin Amendment-and perhaps just days before the Fed comes out with its final rule on debit interchange, a number of CU CEOs say they are still not ready to pull the trigger on plans to make up for lost revenue that is likely headed their way.
The Fed is now expected to enact a final rule that will direct billions of dollars of cuts in debit fees that are required under last year's Wall Street reform bill. The bill requires the cuts be implemented by July 21.
The CEO stance was taken due in part to the fact the Fed has yet to release its final rule on debit interchange, expected to be announced this week or next, and because many are holding off to see if the two-tiered system-which excludes financial institutions below $10 billion from the new rules-will protect small issuers. There are even some CEOs who see a silver lining in the Durbin Amendment.
Just what does the upcoming implementation of the new interchange provisions mean for the credit union industry? "It's going to take months if not a year for us to see how it all shakes out," offered Greg Smith, CEO of the $3.8-billion Pennsylvania State Employees CU. "I wish I could give a definitive answer, but we just don't have enough information at this point. The Federal Reserve Board is likely to increase the rates on the acceptable interchange levels (from the proposed 12-cent cap). I'm hearing 15 to 20 cents for those over $10 billion, which will help. But the real question for credit unions like PSECU is whether the exemption will hold and whether the two-tier system will preserve our current levels of interchange."
As for whether PSECU will be adding fees or dropping programs now, Smith said the answer is "no. We just don't have the necessary information at this point to make such a decision. Our hope is that revenue levels will be maintained with the two-tier system and no changes will be necessary. Adding fees or changing programs will be the very last thing we do and only after all other efforts have been exhausted."
Steve Winninger, CEO of the $1.6-billion Lake Trust Credit Union in Brighton, Mich., told the Journal, "We are concerned about the ultimate impact of the Durbin Amendment on all credit unions, not just ours. We have some ideas on how we can replace the lost revenue, however we are holding off on any decisions until we refine the impact of the options we are considering and also see what others in the market will be doing. We know some banks have added fees to checking accounts and annual fees to debit cards."
Susan Adams, CEO of the $68-million Entrust Federal Credit Union in Richmond, Va., said, "We will continue to look at all of our options to see what will work best for us. It is really too early to commit or comment on what we will do exactly, we simply cannot say for sure."
John Rupert, CEO of Muskegon Co-op FCU in Muskegeon, Mich., said his $44-million credit union will not make changes soon, but for a very different reason. "The silver lining from all this is that credit unions can create a difference between smaller financials and larger financials as the big players add fees. Even if we have to add a new fee structure it can be much less than the big banks and therefore create some distance between us and them."
At minimum, Rupert said MCFCU will go through the next two to three quarters with pricing as is "to see how this shakes out. We may make changes, and we may decide just to accept a lower ROA." ROA has been strong for MCFCU throughout the recession, 1.2% last year after assessments. "If we were at 10 to 20 basis points ROA I might be looking at this differently."
In Sleepy Eye, Minn., the $210-million SouthPoint FCU is another that sees the new interchange guidelines as a means to separate credit unions from the big banks, according to CEO Dick Nesvold. "We anticipate this will be an opportunity in the marketplace, so we will continue to look at the profitability of the total relationship with each member. Our approach for several years has been to offer an attractive checking account and have other products offset the free services by building very deep relationships. So if we can continue to attract members with our present pricing, we will do so as long as we can build a mutually beneficial relationship with them."
The CEO of Shreveport FCU in Shreveport, La., Helen Godfrey-Smith, does not like what the new interchange rules will force her $90-million CU to do. "I can't afford to lose $20,000 to $30,000 a year from my bottom line income. As much as I don't like to say it, I have to increase fees some way. There just won't be as many free accounts. Credit unions' offering free accounts has hurt us as an industry. It has helped us differentiate from competitors for years, but now it will hurt us because our members are accustomed to everything being free."
Like Godfrey-Smith and many other CU leaders, Jeff Disterhoft's concerns lie with the impact the Durbin rules will have on members. The CEO of the $1.2-billion University of Iowa Community CU in Iowa City, Iowa, sees little chance the majority of financial institutions will not search for ways to replace the lost revenue. "The financial sector in aggregate needs a certain level of earnings to sustain itself, and when faced with this sort of blow the industry will react and consumers will ultimately bear the cost. That's unfortunate, as I'm not overly optimistic that retailers will pass along the savings they'll reap from the amendment. In short, consumers will experience a double-whammy that I'm certain was never the intent of Congress, especially in a time of high unemployment."