Without Durbin Delay, A Lot Of Work To Be Done In A Short Time
RANCHO CUCAMONGA, Calif.-With Congress declining to delay the Durbin Amendment on interchange, financial institutions, card processors, payment systems, and merchants have a lot of work ahead to prepare for the July 21 implementation of the new debit interchange guidelines.
New fee tables must be produced and data processing changes made-particularly with merchants, card processors, and payments systems to accept the new two-tiered system that exempts financial institutions under $10-billion from the proposed 12-cent cap.
All that work will have to be completed before there is any chance the suit by Minnesota's Twin Cities Financial Bank could have any influence over the new interchange rules, explained Jim Hanisch, EVP of network operations and corporate development for CO-OP Financial Services and chairman of the Electronic Funds Transfer Association.
"Regarding the TCF suit, in layman's terms, the court said nobody was injured yet. So until someone is injured there is no basis for a suit. Well, if the new interchange rates go into effect July 21, then TCF is going to be injured and I think at that point the suit will have legal standing to move forward. We all will be watching it closely as it winds through the courts."
Hanisch contended there is nothing in the way of the new rules taking effect July 21, and the Fed is expected to approve a final rule in time for its June 20 scheduled meeting.
"But the Federal Reserve has to do a lot in a short period of time," noted Hanisch. "I don't know how the Fed could extend the date, with the Durbin Amendment providing a specific date of July 21. I believe things will depend on the complexity of the Fed's rules. Heaven only knows how those rules will be written, what the requirements will be, and what kind of system changes will be needed to accommodate these requirements."
'An Awful Lot of Work'
All of the parties in the transaction chain are under a time crunch. "There probably is good question as to whether from a data processing standpoint all of the necessary end-to-end changes and testing can be completed in such a short timeframe," added Hanisch. "An awful lot of work has to be done and lot of that work is not well defined yet. Nothing is clear, not even the 12-cent cap."
What is clear, according to Jeff Russell, EVP with The Members Group, is the era free checking is certainly gone. Russell noted there has been a lot of discussion about free checking's demise, but now steps will be taken by many more credit unions.
"I'd say in less than three years every financial institution will have to eliminate free checking on all but the highest-balance, most profitable members."
Russell said the Des Moines, Iowa-based TMG had been stressing to clients since December to work for the best but prepare for the worst. "And the Senate's decision is pretty much what we thought would happen. We certainly hoped it would change and there were valid reasons, but at this point it looks like there will be no legislative solution."
As a result, credit unions need to focus on their business model, Russell emphasized. "You have to take a look at how your model works in a world where even if a dual interchange system happens, the interchange rate is unlikely to be the same as it is today."
Time To Build Tactics
Russell believes that even as financial institutions hoped there would be a delay, many credit unions were ready for last week's outcome. "But not all. Many had been looking at Durbin for a long time, put plans together, and put them on the shelf hoping to never have to use them. But a lot of folks are examining their debit portfolio and trying to understand who their active cardholders are, who are profitable and unprofitable, and how to cross-sell them to make the relationship more profitable. Many have strategies, now they have to build tactics."
Mark Sievewright, president of credit union solutions at the Brookfield, Wis.-based Fiserv, said his organization is extremely disappointed at the outcome of the Senate vote and concerned about the enforceability of the $10-billion exclusion for small issuers. "But we are also optimistic that debit is growing. We expect 11 billion transactions to convert from cash and checks over the next three years to payment cards, especially debit. That is an opportunity for significant incremental revenue despite the lower interchange rates."
Sievewright emphasized that credit unions need to focus on reinventing non-interest income streams. "We need to look to the next 10 to 15 years and say what does that income stream look like, how do we redefine it, and what initiatives do we need to change as a movement."