Some pundits would say the final form of the Durbin Amendment to the Dodd-Frank Act was a minor victory for the financial services industry. Although early versions of the legislation had called for a 12-cent cap on interchange fees for debit card transactions, the final amendment, which went into effect on Oct. 1, 2011, capped those fees at 21 cents. Certainly, the change was not as momentous as it might have been.
Some might also think the credit union world will be almost completely unaffected by the change, since the provision that caps interchange fees specifically exempts institutions with assets of $10 billion or less—which is all but three of the U.S. credit unions currently in existence.
But the reality is far more complex. For one thing, many institutions below the $10 billion mark feel market forces will eventually drive down interchange rates for everyone. Not only that, but the Federal Reserve has promised to study the effects of the Durbin Amendment throughout the industry and note any unintended consequences. That leads many smaller institutions to wonder if their interchange fees will be capped next.
At the same time, Durbin gives retailers the ability to choose which debit network they process their transactions on. Until now, financial institutions were usually able to specify their preferred network and get the highest interchange possible. Now, it’s safe to assume merchants will send everything to the network with the lowest interchange rate. Credit unions that are members of several PIN debit networks may find they need to revisit their debit card strategy or face losing a great deal of that income.
“I think that was the logic of a lot of the feedback that was provided to legislators from our industry,” says Eric Acree, executive vice president of $650 million Vantage Credit Union, Bridgeton, Mo., with 100,000 members). “OK, you say we’re exempt, but in reality, how long will this last? Because the ultimate decision rests with the merchants. At some point in the future, you could see a change where we’re more or less forced to adopt the same pricing in order to stay competitive and maintain our volumes.”
The result is that credit unions are acting on the belief that the legislation will affect revenue, regardless of where they fall on the size spectrum. For example, $23 billion State Employees’ Credit Union, Raleigh, N.C., with 1.6 million members, which is one of the three CUs not exempted from Durbin, expects a 40 percent decrease in interchange income in 2012, according to Leanne Phelps, the CU’s SVP/card and record service.
Meanwhile, $1.5 billion, 91,000-member Lake Trust Credit Union, Lansing, Mich., is forecasting a 25 percent reduction in interchange income based on the indirect effects of the amendment. And CUES member Jane Kile, Lake Trust CU’s SVP/strategic services, suspects that won’t be the end of it.
“One of my colleagues just shared with me today that while it’s the $10 billion and over right now, MasterCard and Visa are talking about that next group down,” says Kile. “So I think it’s possibly just a matter
of time. We want to be proactive rather than reactive.”
Rick Blood, VP/mortgage and consumer lending at U.S. Federal Credit Union, Burnsville, Minn., says his team started identifying threats to revenue back in 2010. They haven’t changed any products or services yet, but they formed a task force several months ago and created a proprietary list of strategies to implement if revenue problems materialize.
“There isn’t anything on there, really, that’s Draconian or that is really wild or that would throw people for a loop,” says President/CEO Bill Raker, CCE, and a CUES member. “But it’s things that make sense, things that are perhaps more logical today or may even be more logical for us to implement in the future. The landscape of the marketplace is changing, and I presume that the consumer is anticipating that there would be some reaction to that.”
Talking Terms
While some banks have already implemented fees to make up for interchange revenue losses, most credit unions seem to prefer solutions that don’t pass on the cost to members. Phelps says State ECU is going ahead with a switch to chip-and-PIN technology, hoping to reduce fraud losses and thereby offset the lower revenues. At the same time, as she works with vendors on the new cards, she is hammering out new deals that will be more cost-effective.
“Another part of Durbin is that we’ve got to add a second network for routing transactions,” she explains. “So as we’re doing that, we’re doing a little bit of renegotiating to reduce some of the click charges or transaction fees we’re paying—renegotiating on some of our transaction fees both on the signature side and the PIN side. We’re trying to make it more efficient and reduce our daily operations and ongoing operations to help make up some of that difference.”
Some CUs are renegotiating better terms with their vendors based on a loophole in the Durbin Amendment. The legislation theoretically bans exclusive relationships with processors but, in reality, it only says financial institutions have to be in a minimum of two debit networks; it doesn’t say what kind. This requirement can be fulfilled by having one signature network and one PIN network that are unaffiliated. So many vendors are giving better terms to financial institutions that use them as their sole PIN network.
“The network vendors are basically coming up with three interchange schedules,” says Michael Croal, senior director at CUES Supplier member Cornerstone Advisors, Scottsdale, Ariz., a CUES strategic provider. “One is for the regulated institutions, the institutions over $10 billion. And then for the nonregulated institutions, those under $10 billion, they’re coming out with a fairly lucrative interchange schedule that is for those that are exclusive with them, and then [a less lucrative] one for those that are not.”
This sort of deal is made all the more compelling by the new power given to merchants, he points out.
“The thing is, if you had a multiple network scenario today and you’re not regulated, you’re going to get the worst of the two schedules from all three or all four of your network vendors, however many you have,” he says. “So when a merchant gets your card, they’re going to pick the worst of the worst. So certainly going an exclusive route can make a pretty big difference on the interchange side.”
The Credit Card Strategy
One of the less-talked-about provisions in the Durbin Amendment is the one that allows retailers to impose a $10 minimum on credit card purchases, and to give discounts to consumers who pay with a debit card or with cash. No one knows yet what the long-term effects of this provision will be, but some feel it has the potential to scuttle any income financial institutions might attempt to make by driving traffic to credit cards instead of debit cards. Still, that hasn’t happened yet, and some credit unions regard credit cards, with their significantly higher interchange fees, as a possible way to replace lost debit interchange revenue.
“We’re looking at enhancing the rewards program for credit cards,” says Kile. “We’re looking at lower-ticket item rewards so members can earn faster. We want our members to use their credit cards and not have to wait until they build up 20,000 or 30,000 points before they can turn them in.”
The only down side of driving traffic to credit cards is that it presents an opportunity for consumers to unwittingly get themselves in debt. For this reason, some credit union members may be reluctant to go that route. And some credit unions may find the prospect unsettling—after all, shouldn’t they be helping their members manage money responsibly? Is this the message they want to be sending?
Croal believes that over time, as a result of Durbin, credit unions will build a better mousetrap to get around the debit interchange caps and yet still offer members a debit-like experience.
“For example, you might offer rewards for [members who pay for everyday expenses with] credit cards, then have some other program where either every night or every month, you sweep [money] from the checking account to the credit card to pay off the items that the member would have normally put on their debit card,” he suggests. “So groceries, fuel, that kind of stuff, is paid for from checking. The member doesn’t run up a huge credit card balance, they get the rewards points out of the credit card, and the credit union gets the interchange revenue out of the credit card.”
Croal says he doesn’t know of any credit unions that are using tactics like this yet, but he is confident CUs will develop workarounds to deal with the impact of the Durbin amendment. That’s why the Fed has promised to study the legislation’s long-term effects: No one knows yet what new products and services will spring up in its wake.
“The balloon is only so big,” says Croal. “You push it on one side, it’s going to come out the other side. That’s what’s happening right now.”
A Different Angle
Debit cards were profitable; now they will perhaps be somewhat less so. CUs will have to make up the difference by either increasing volume or refocusing their attentions on other products.
“There are some things that we are doing that we see as opportunity that would be an offset to whatever the impact might be,” says Raker. “For example, we have a number of members who have our debit cards in
their wallet, but apparently they’re not using them. So getting members to activate those cards would increase the transaction volume. There are other members who have the card, but use it minimally, so getting them to increase the usage of the card would be a benefit as well.”
Fees would be another way to bring in make-up revenue, but credit unions in general aren’t going that direction. Acree says the fact that some institutions are passing on the expense to consumers was
an unintended (if foreseeable) consequence of the amendment, and most credit unions don’t want any part in that.
“That was the concern of our industry, in sending letters and comments to the legislators, the decision-makers, the lawmakers in D.C.,” he says. ‘We were trying to convince them that this is bad, because ultimately, it’s going to impact the consumer. The institutions that are impacted by Durbin, many are responding by tacking monthly fees on for having a debit card.”
Indeed, some credit unions were quick to distance themselves from the idea of debit card fees. In mid-October, just after Durbin went into effect, $4.5 billion San Diego County Credit Union with 201,000 members sent out a press release reassuring members the CU wasn’t following BoA’s lead.
“Big banks are making it very difficult for consumers to avoid fees,” the CU’s president/CEO, Teresa Halleck, a CUES member, was quoted as saying in the release. “In contrast, SDCCU continues to offer many free services to our customers.”
There aren’t any new fees at Lake Trust CU, either. Instead, to make up for any lost revenue, Kile is focused on building member relationships so members use more of the institution’s products and services. At the same time, she says her CU is in the process of hiring three new business development officers to bring in commercial relationships.
Even State ECU, with assets that put it the regulated interchange-cap group, has no intention of tacking on a fee, either now or in the foreseeable future.
“We’ve never been about making the money on these services,” says Phelps. “We want to keep the money in our members’ pockets. So there have never been any fees associated with our debit card. It’s much cheaper for us to process an electronic transaction than it is to process a check. [Using debit means] more transactions out of the branch, [saving the credit union the associated] operational costs. So we want our members to continue using that debit card.”
Jamie Swedberg is a freelance writer based in Georgia.
