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PULSE Issuers expect 73 drop in interchange revenue
HOUSTON (4/27/11)--Small debit card issuers such as credit unions and community banks on average expect a 73% decrease in debit interchange revenue as a result of pending interchange fee rules, according to the 2011 Debit Issuer Study commissioned by PULSE, an electronic funds network. Although institutions with less than $10 billion in assets are exempt from the regulations proposed by the Federal Reserve Board under the Durbin Amendment in the Dodd-Frank Act, they are critical of the interchange cap and skeptical the exemption will be effective, according to PULSE, a Discover Financial Services company. "The study results support broad industry consensus that the proposed interchange cap will likely affect even exempt issuers," said Steve Sievert, senior vice president of PULSE. "However, the impact small issuers say they are expecting is greater than many anticipated," Sievert added. In the study, respondents said they expect, over time, interchange income to decrease due to marketplace pressures. Even if a network offered two-tier pricing, the market-conditions shift would eventually require the interchange rate for exempt institutions to be reduced, they said. Other findings:
* The proposed network exclusivity provisions are unnecessary given the interchange cap. *Almost all issuers preferred the alternative that would require two unaffiliated networks on each debit card, given that many are already compliant with that requirement. * An alternative requiring two network choices for each method of authorization--such as two for PIN and two for signature--would create major operational challenges without providing value to consumers, respondents said. * Issuers expect the interchange proposal to significantly impact their demand deposit account business. * Fifty-four percent of regulated institutions and 27% of exempt institutions said they are evaluating additional fees or reducing benefits. Exempt issuers are considering reducing rates on high-yield check accounts, eliminating ATM fee rebates and charging account holders for the service of having a checking account. Many are assessing debit rewards. * Many said they will encourage consumers to increase use of PIN debit instead of signature debit because PIN transactions will have a better bottom-line contribution for issuers.
"There is unanimous agreement among financial institutions we surveyed that the Durbin Amendment will adversely impact consumers," said Tony Hayes, Oliver Wyman partner and project leader of the study. "To recoup lost revenue, issuers will charge higher fees for banking services, reduce debit card benefits--such as rewards and zero liability protection--and introduce restrictions on how debit cards can be used." PULSE has commissioned the benchmark Debit Issuer Study for the past six years. The Credit Union National Association has urged Congress to stop and study the fed proposed rule's impact on credit unions and consumers.


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