By Jim Ghiglieri
Last week, credit unions and their debit program partners were finally able to exhale, having held their collective breath for months in anticipation of the Fed’s final rules governing debit interchange and network routing.
Not only were many in the industry relieved to see a more realistic interchange cap; they were also calmed by the Fed’s decision to enact the lesser of two evils where network routing was concerned.
Rather than force issuers to assign a total of four unaffiliated networks to their debit cards (a requirement that would have been extremely problematic for credit unions), the Fed is requiring a minimum of only two unaffiliated card networks, such as one for PIN transactions and one for signature transactions. Unlike the interchange cap portion of the rules, institutions under $10 billion are not exempt from the network routing requirement.
It’s important to understand that although the final rules put a smaller strain on the interchange income of credit unions, there will still be a noticeable decrease from the government’s price-fixing measure. Today, PIN debit transactions bring in an average of 25 cents in interchange; signature debit transactions bring in an average of 45 cents. With the new cap set at 21 cents for both signature and PIN transactions (give or take a few more to cover fraud prevention costs), there will be a perceptible reduction in debit interchange income for credit unions.
While nearly all credit unions are technically exempt from the interchange cap because they are under $10 billion in size, there is a very real potential for a trickle-down effect that may still impact smaller financial institutions. The final rule prohibits issuers from restricting a merchant’s ability to choose the network on which a transaction is routed. This is likely to create a market pressure that will force “exempt” credit unions to lower interchange fees to remain competitive.
However, given the enactment of a two-network regulation, it may be possible for current or near-current interchange structures to remain effective for credit unions over a longer duration. That’s because merchants will have only two (vs. four) unaffiliated networks to choose from, causing interchange to decline at a much slower pace than it would have, given more merchant choices.
Fortunately, most credit unions are already in compliance with the two unaffiliated network routing requirement today and will not incur the cost to join an additional network.
Now that the final rules have been revealed, and we’ve all had a week to absorb the regulation intricacies, it’s time to begin setting new strategies for this fall. The clock on those strategies is ticking, as we now have less than three months until the rules go into effect on Oct. 1.
For many, these strategies will deal largely in cost-cutting measures. If they haven’t already, card managers should be sitting down with their processors to closely examine their per-transaction costs. By better aligning expenses with their new level of anticipated income, credit unions will be in a much better position to continue offering fee-free debit programs for their communities.
Jim Ghiglieri is VP/corporate communications for SHAZAM, a provider of debit, ATM and other payment services. He can be reached at jghigli@shazam.net.
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