Act now to urge protection for credit unions concerning interchange

Urgent action by credit unions is needed to shape the final version of a proposed new rule on interchange fees from the Federal Reserve Board that, in its current form, would not only strain credit unions’ balance sheets, but also increase costs for credit union members.

The Fed’s rule on interchange flows from the interchange amendment to the Dodd-Frank financial reform bill passed by Congress earlier this year. The rule, which proposes two frameworks for assessing interchange fees, would cap debit card interchange fees that are paid by merchants to larger card issuers at 12 cents per transaction.

Issuers with under $10 billion in assets would be exempt from the interchange changes. However, the proposal as currently written would undermine the exemption because it contains no mechanism that would prevent merchants from turning away debit cards from credit unions or other smaller issuers at the point of sale.

Moreover, although the Fed’s proposed rate cap was set in accordance with the law (which requires that the rate reflect "reasonable costs" to card issuers), the law only allowed the Fed to consider certain costs – those related to switching and data processing, but not the cost of issuance, fraud prevention, fraud itself or other costs.

Besides causing a loss of interchange revenue at a time when credit unions can little afford it, the rule as proposed may require small issuers to bear new costs associated with having to join additional networks. The result would be a strain on credit unions’ ability to build net worth and a likely increase in fees for credit union members.

"By law, credit unions can only build net worth from retained earnings. Any significant reduction in interchange income will require higher fees paid by consumers," said League President & CEO Brett Thompson. "Credit unions must act now to ensure that the protection for smaller issuers that Congress intended is preserved as the Fed acts to implement the law. Shy of that, debit card holders and their credit unions will be footing the bill."

The Federal Reserve Board has stated that the maximum allowable interchange fee under either proposal would be more than 70% lower than the 2009 average. CUNA estimates that under the rule 67% of credit unions could lose debit-related revenue.

Both CUNA and Congressman Barney Frank have expressed concern to the Fed for credit unions under the proposed rule. CUNA and The League are also developing more comprehensive comment letters.

Credit unions are urged to respond to the proposed rule, and explain the effect it would have on members, by using the League’s Grassroots Action Center. Comments are due Feb. 22. The final rule is set to take effect July 21, 2011.