MADISON, Wis. (12/9/10)--A recent Filene Research Institute study looks at how federal regulation of interchange fees on debit card transactions will affect credit unions. “Interchange Regulation: Implications for Credit Unions,” written by Adam Levitin, associate professor at Georgetown University Law Center, examines how the Durbin Amendment to the Dodd-Frank Act that Congress passed this summer will lessen the roughly $17 billion in debit interchange paid to issuing financial institutions every year. Key findings of the study are:
* Growing credit union debit: Debit card activity at credit unions has grown briskly in the past four years. Median debit transaction dollar volume grew at an average rate of 12% from 2006 to 2009, while the median number of transactions grew at a rate of 9% during the same period. * Curtailed interchange will hurt: Debit interchange accounts for between 4% and 5% of credit unions’ gross revenue, while credit interchange is in the range of 1.5% to 2.5%. A 50% or greater decline in debit interchange revenue is possible for institutions larger than $10 billion, with 20 to 40 basis points (bps) a realistic possibility--down from 75 to 125 bps. * Reasonable and proportional: The true cost of the Durbin Amendment will become clear once the Federal Reserve rules on which charges are reasonable and proportional to the cost incurred by institutions to process debit transactions. Institutions may include the cost of fraud but not the costs of overhead or marketing. * Multi-homing: Institutions with less than $10 billion in assets may be shielded from the “reasonable and proportional” interchange standards, but they will still be subject to “multi- homing”--the requirement that each card be capable of processing a transaction on more than one network. Competition among networks will allow merchants to route transactions to the network that saves them the most money, which will push down income for issuers.
What are the implications for credit unions? Any regulatory movements will affect profitability, especially in a core product like debit cards, Levitin said. But the Durbin Amendment is particularly noteworthy for its likely middle- and long-term implications, he added. They are:
* Competition for small issuers: It is likely that competitive pressures will encourage networks to adopt separate interchange schedules for smaller institutions, which could leave small issuers’ debit interchange revenue largely untouched by the Durbin Amendment. If a two-tiered interchange structure emerges, it will help make credit unions more competitive in the card issuance market, Levitin said. * Mobile advances: Regulatory reform will likely encourage payment card networks to push aggressively into new--and less regulated--markets, particularly mobile commerce. If so, credit unions generally will have to look to license customizable mobile software platforms and piggyback on network-negotiated deals to gain a foothold in mobile payment transactions. * Threats to fees abound: The Durbin Amendment highlights the difficulties that credit unions face from an increasing reliance on fee-based revenue. Credit unions may find it necessary to adjust the bundle of services they offer with deposit accounts, possibly re-emphasizing credit cards that maintain attractive interchange rates.
“The $10 billion exemption may salvage debit interchange revenue for most credit unions. But expect it to hasten the move into new technologies and encourage the issuance of more credit cards as large banks and payment networks seek to win back lost income,” Levitin wrote. For more information, use the link.