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Debit Study: Interchange Rule Affected Regulated, Exempt Issuers
HOUSTON (7/11/13)--Debit-card issuing financial institutions experienced continued growth in their debit business, but both regulated and exempt issuers saw decreases in their interchange revenues since regulations enforcing the Dodd-Frank Act capped that revenue, according to the 2013 Debit Issuer Study commissioned by PULSE.
The cap on interchange rates reduced the debit interchange revenue for issuers with at least $10 billion in assets--the "regulated issuers." The average rates declined by 59% for signature debit transactions--to 23 cents from 52 cents on average--and by 32% for PIN debit transactions--to 23 cents from 32 cents--since the regulations went into effect, the study found.
Although "exempt issuers" with less than $10 billion in assets--which includes most card-issuing credit unions--are not directly subject to the interchange cap, they, too, have seen average interchange rates decline. Exempt issuers in the study cited competitive dynamics as a cause of the two-cent decrease in their average rates for both signature and PIN debits, said PULSE's report.  What's more, one in three exempt issuers in the study said they expect further declines in debit interchange.
The findings support the position of the Credit Union National Association, which has said that although credit unions and other financial institutions are not subject to the regulation, they would be impacted by the interchange-fee limit. If the total fee were reduced by $1.2 billion--a number that was central to a settlement Visa and MasterCard negotiated in an antitrust lawsuit--credit unions with card programs would lose about $50 million in total revenues--or 0.5 basis points of their total assets, CUNA said (News Now Nov. 12).
The interchange revenue allows credit unions to provide cost-effective, essential card services to their members. Any reduction in revenue credit unions experience essentially will not find its way to consumers' pockets but is more likely to end up in merchants' cash registers, CUNA said (News Now Nov. 12).
Other findings of the study indicated that both regulated and exempt issuers are making fundamental changes to their debit businesses in response to the debit interchange revenue reduction.  Among the most common actions are:
  • Reducing debit operating costs to better align costs with debit's new revenue proposition;
  • Reducing fraud to support the cost-containment goal and to qualify for the fraud prevention payment outlined in Regulation II;
  • Adjusting their overall demand deposit account product structures to either grow the financial institution's wallet share with a particular type of account holder or direct account holders to accounts that generate more revenue or have lower service costs; and
  • Restructuring or eliminating traditional issuer-funded debit rewards programs--40% of the regulated issuers terminated or restructured their programs in 2012).
As for growth, issuers experienced a 14% increase in PIN transactions and a 6% jump in signature transactions. When asked about their outlook for 2013, issuers were more cautious: they projected smaller growth levels this year, with PIN volume forecast to increase by 8% and signature transactions by 4%.

Tony Hayes, a partner at Oliver Wyman and co-leader of the study, noted that this is the lowest growth projection for signature debit seen since the study began.

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