Compliance Blog

Last Thursday evening, The U.S. Senate added an amendment to the general regulatory reform bill that will affect interchange fees.  The amendment was offered by Senator Durbin's (D-Ill.), and the language will reduce interchange income for every financial institution in America.  Here's an overview of the amendment, and what might lie ahead.

First, here's a link to the actual language of Senator Durbin's amendment.  The following is my initial analysis. 


 

The process.  The amendment is now part of the overall regulatory reform bill, which has not passed the Senate.  We expect it will, but then it very likely will go to "conference."  This is the process where the Senate and the House iron out differences in the legislation that each body passed.  There remains the possibility that the conference process could chip away at Sen. Durbin's amendment.   

• Even with the conference process, the end result will likely put downward pressure on your interchange fee income, regardless of your asset size.

The Fed.  Senator Durbin's amendment mandates that the Federal Reserve issue a final rule within 9 months of the final passage of the reg reform bill to address interchange.  The Fed must draft rules that determine whether an interchange fee is reasonable and proportional to the actual costs incurred by the issuer (the financial institution) or the network with respect to the debit card transaction.  In addition, issuers with less than $10 billion in assets (including affiliates), are exempted from the Fed's rule.  

• At the end of the day, Sen. Durbin's amendment drops much of the issue in the lap of the Fed.  This isn't the worst-case scenario.  The Fed's process will include a notice and comment period where we can point out all the costs involved when one is an issuer.  
• The Fed's deadline for a final rule is 9 months, but likely there will be a delayed implementation.  My gut expects that most changes will not take place for more than a year after final passage of the entire reg reform bill.  The amendment does appear to require that the rule concerning debit card interchange fees must be effective within a year of the reg reform bill being signed into law. 
• Keep in mind the limitations in the reach of the Fed.  Their rule will only touch debit card transactions, and only for institutions with more than $10 billion in assets, including affiliates. Currently, that threshold only affects three credit unions, but the asset threshold is not indexed for inflation and growth.  So, as time marches forward, additional credit unions will be affected.

Merchants will be able to offer discounts depending on the payment method or network involved with a transactions.  But they may not discriminate against an issuer.  And this change affects all issuers, regardless of asset size.  This should put some downward pressure on interchange income, as some consumers will pay cash to get discounts. 

• In short, this will allow merchants to offer a cash discount, check discount, or credit and debit card discount, if they so choose.  Likely, we'll see cash discounts, as merchants do not want to handle checks. (I don't care what they say.)  They will not be able to discriminate against an issuer.  Here's what that means.  When the Fed issues its final rule, it could lead to a reduction in interchange fees for those larger issuers ($10B and above).  But since smaller issuers are exempt, this could lead to an interchange discrepancy.  Larger issuers receive less (merchants keep more) and smaller issuers receive more interchange income (with merchants keeping less).  Even so, merchants would not be able to discriminate against small issuers.  They can't steer or induce consumers into using your Bank of America debit card, as opposed to your Awesome Smaller Federal Credit Union debit card.

Card networks will not be able to prevent merchants from establishing dollar amounts (minimum or maximum limits) for credit card transactions, but not debit.  This change will affect all institutions, regardless of asset size.   

• You may want to see what portion of credit card interchange income you lose if you lopped off  50 percent of your credit card transactions that are less than $5, $10, and $20.  Some merchants will use this new method.  In addition, you may want to see what happens when you lop off a portion of your larger transactions. 
• The market should work in our favor on this one.  Merchants that establish a minimum or maximum will be less convenient.  Consumers will either keep more cash on hand, or they'll visit merchants without the minimum.  Look at the trends: do you see more merchants demanding cash, or more merchants accepting plastic?  We are moving away from cash as a society.  This blunts this part of Sen. Durbin's amendment, in my humble opinion. 

So, what do we do?  

• First, we wait.  The reg reform bill has not passed.  If it does (and it likely will), it very likely will go through conference.  Assuming that the conference process does not change anything regarding Sen. Durbin's amendment, the Fed must issue a proposed rule and ask for comments.  Only after the final rule will we know for sure what we are looking at.  
• You may want to start to gather and organize costs related to your role as a debit card issuer.  The Fed, according to the amendment, is not supposed to consider indirect issuer costs, such as fraud, insurance, customer service, etc.  But that seems unreasonable given all the foundational costs that must be borne before a transaction can be completed. What are the costs of the cards, the postage, the disclosures, the compliance reviews, the policy drafting, the dispute process, fraud, the cost of breaches, the cost of marketing, etc.  When the Fed issues its proposal, it will seek information on the costs of debit card transactions and how those costs differ from checks.  Give them numbers.  Here's an example.  It takes your card dispute person  X hours to handle a dispute.  Multiple that X by her hourly wage.  (Just take her annual salary, with benefits, and divide by the number of hours in your work year.). That tells you how much each dispute costs.  Then multiply that by the number of debit card disputes. And do that for each person.  Again, the amendment instructs the Fed to ignore those costs, but I can't see how thy would do that.  We'll have to see how this plays out.
• Looking at the amendment, start to estimate how it could affect your interchange fee income.  Build that process into your budget process, noting that the changes will not kick in for a year or more. 
• Prepare for a bit of...well, chaos.  Merchants will be able to offer discounts, create credit card minimums and maximums.  When the changes hit, consumers will be bombarded with all the new choices. There will be uncertainty, and where there is uncertainty, there will be risk.  
• Finally, I'm not sure how VISA, MasterCard, or others will ultimately handle the changes.  They may be required to lower rates for the big issuers.  Will they maintain higher rates for smaller issuers?  How would the public perceive such differences? I really don't know.