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Interchange amendment report Negative impact in five areas
MAYNARD, Mass. (6/11/10)--The interchange amendment in the Senate version of the regulatory reform bill would have negative consequences in five areas, according to an independent industry study. The amendment, which would allow government intervention in setting interchange fees, is strongly opposed by the Credit Union National Association and the nation's credit unions. This week hundreds of credit union representatives hiked the Hill in Washington, D.C., while more than 400,000 contacts with congressional representatives were made by credit unions grassroots supporters delivering the message: "No interchange amendment."(See related story in News Now's "CUs' interchange efforts noted in Wash. Post.") The report from Mercator Advisory Group, a firm based in Maynard, Mass., analyzed the potential impact of the amendment on the electronic payments industry. Among the findings:
* The cost of financial services will rise for consumers across a wide range of economic levels. * The largest issuers will have less of an incentive to promote debit-related products and services, and will either shift activities toward credit-based services or will cover their costs differently by fee-based approaches to debit accounts. * The smaller financial institutions, though exempt from portions of the amendment, are unlikely to escape undamaged. Wide government-mandated pricing discrepancies between large players, whose fees are price-controlled, and smaller exempt issuers would be difficult to sustain from a network perspective. The report noted "major public statements by smaller issuers expressing concern over the loss of their customers to those institutions mandated to charge artificially low rates." * State and federal agencies that recently migrated public benefit payments from paper checks to prepaid card programs are growing increasingly alarmed at the impact this legislation would have on these programs and their ability to continue supporting them without additional funding sources. * Merchant benefits may not be as robust as anticipated. While direct debit interchange costs may be lower (depending on the current rates which vary widely), merchants may see a shift in consumer usage toward credit products, a decline in average ticket size as fewer cardholders opt for debit in an environment with lower promotional activities, or more transactions taking place in less efficient forms such as cash and paper checks, the report said.
The report said the amendment has five erroneous assumptions:
* "The amendment falsely assumes that debit cards and checks are a functionally equivalent, or similar, payment scheme which implies that a common cost structure exists under which these forms of payment are processed." * "Proponents of the amendment incorrectly assert that small financial institutions are protected from harm." * "The amendment also appears to assume, contrary to prevailing evidence, that regulation of payment schemes operating in the U.S. economy will improve market conditions and benefit consumers." * "Proponents of the amendment incorrect assumes that imposing price controls would not have broad, sweeping unintended consequences for key stakeholders." * "The amendment incorrectly assumes that all debit card value chains are the same and so failed to identify that prepaid cards, which run under the debit scheme, will cost more for both government and low/moderate income citizens."
The reported noted that smaller financial institutions would be harmed because establishing and sustaining a two-tiered structure would be unlikely. Under a two-tiered structure, small institutions would charge market-based interchange fees while the larger banks responsible for approximately 80% of debit transactions would be limited to a much lower government-controlled rate. "It is not clear why any of the large banks, which are essential to achieving the scale necessary for a nationwide or global network, would continue to sustain a system that provides such a dramatic advantage to thousands of [their] competitors. A potential outcome is that card networks find it necessary to implement a single interchange schedule based on the Federal Reserve's ruling in order to best preserve the integrity and value proposition of their debit and credit systems," the report said. "In summary, it is our opinion that caution is warranted before any regulation of this type is enacted," said the report. "It is evident by the numerous calls for additional consideration being made by state agencies, credit union advocacy groups, industry experts, and independent analysts that further study is warranted and justified."

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