Legislative Update

Update August 1, 2011:   The dust is still settling around the July 29, 2011 passage of the final version of the Durbin Amendment to the Dodd-Frank Wall Street Reform and Consumer Protection Act, and it is unclear whether credit unions will consider themselves victors or victims.

A cap on debit interchange fees that was originally proposed at 12 cents per transaction emerged in July at a 21 cent cap with a 1 cent fraud charge plus .05 percent of the transaction’s value, which takes effect October 1, 2011. Interchange fees bring in a reported $14-19 billion in revenue for financial institutions.

Although most credit unions will be exempt from the regulation, as exemptions include all financial institutions with $10 billion or less in assets and government benefit cards, they will not be unaffected. Credit unions and smaller financial institutions have held that the interchange fees are required to fund fraud protection and rewards programs. The exemption means that credit unions will not have to change their business models or issue new cards, at least over the short term, but the practical implications of the new rule may subvert the intentions of the legislature in exempting those credit unions.

For credit unions and other small issuers of debit cards that are subject to the regulation, the decrease in interchange fees means less fee per transaction—and lower prices for consumers are not a likely result. Merchants currently pay just under 50 cents per transaction, and that amount is split between the merchant’s bank and the card issuer. The Federal Reserve Board warns that lower interchange fees in other countries, such as Australia, have not lead to lower consumer prices.

The ability to add the 1cent fraud charge requires the issuer to demonstrate they follow specific fraud procedures, and the .05 percent per transaction fee is also ostensibly related the cost of fraud protection. Although the amendment does not actually lower fees for merchants, it nearly halves the interchange rate for debit card transactions.

It will allow merchants to choose how their transactions are routed, and will require those subject to the amendment to carry two or more debit networks (one PIN and one signature network) that are nonaffiliated. Originally, issuers might have been required to participate in as many as four networks. The two network rule does not take effect for issuers until April 1, 2012. These merchant-directed routing fees will likely create a burden on small banks and credit unions regardless of their exemption from the rule.

An immediate result of the changes was a restructuring of fees by Visa designed to preserve routing profits, incentivizing merchants who continue to use their network once they can route their own transactions.

The results of the amendments may be additional fees for existing debit cards and the end of many rewards programs. However, the end of such programs may not be felt by many, according to a study by Mintel Compermedia which found that a little less than half of debit rewards participants have redeemed their points.

Overall, however, it is still likely that debit interchange is a declining source of revenue as the processors court merchants, who may now choose transaction routes, rather than issuers. The rule will also likely be revisited in the next few years as regulators observe results.