WASHINGTON (2/24/11)--While raising concerns about how the current interchange system affects consumers and supporting the general intent of legislation passed last year, the Consumer Federation of America (CFA) also urged the Federal Reserve Board to “pay close attention to the effect” that parts of its implementation plan could have “on smaller depository institutions, especially credit unions." CFA in a comment letter urged the Fed to ensure that financial institutions be reimbursed for legitimate incremental costs associated with debit card services, as required by the statute. If the Fed requires an interchange rate scheme too low to cover incremental debit card program costs, it could harm consumers by leading financial institutions to “significantly increase costs for debit card or other banking services.” The consumer group added it is particularly concerned about the effects on (low- and moderate-income) accountholders of such increases, “especially if the increases lead some accountholders to leave their bank or credit union entirely.” The Fed interchange plan offers a dual framework for determining interchange fees. One plan would provide issuers with a safe harbor of seven cents per transaction, and set a maximum interchange fee cap of 12 cents per transaction. A second alternative framework would cap the maximum interchange fee at 12 cents per transaction. These safe harbors and/or caps would be reevaluated by the Fed every two years. Citing data from Navy FCU that the seven-to-12 cent rate won't cover all incremental costs, the CFA letter recommended that the Fed "broaden its pricing standard.” The Credit Union National Association (CUNA) also had multiple dialogues with CFA on interchange issues, as has Doug Fecher, president/CEO of Wright-Patt CU, Inc. in Fairborn, Ohio, who serves on the CFA board. CFA said pricing could include, for example, network processing fees for each transaction processed, charge-backs involving billing errors, and fraud losses over which the Fed determines the issuers had no ability to prevent. As noted, the consumer group urged the Fed to "pay close attention to the effects of particular options on smaller depository institutions, especially credit unions," which often have higher incremental costs. The Fed has proposed an exemption to the interchange rule for credit unions and small institutions with under $10 billion in assets, but CUNA and others have questioned whether it would be effective in the marketplace. The CFA letter noted that the exemption has prompted VISA to indicate it will bifurcate interchange rates. “If smaller institutions receive higher interchange rates, it could help them cover the higher incremental costs they normally pay because they lack economies of scale,” noted CFA. “However,” the CFA letter continued, “Federal Reserve Chairman (Ben) Bernanke has stated that market competition might nonetheless cause these institutions to receive lower interchange income. “We urge the Federal Reserve to closely monitor how the debit interchange market for small institutions develops and how the financial viability of these institutions is affected. Credit unions especially often provide a safe, lower-cost alternative for many Americans.” The CFA called on the Fed to launch "a broad, balanced study of the effects of the rule it implements upon implementation.” This study should evaluate a number of factors, including its impact on the following:
* Whether, and to what extent, retailers pass through interchange savings to the cost of goods and services paid by all consumers. * The cost of debit card and all banking services. * The structure and practices of payment card networks. * The financial viability of smaller financial institutions, “especially credit unions."
The CFA letter did criticize the current interchange fee system, for instance saying there is poor competition among payments networks, and alleging hidden interchange pricing and cross-subsidies being paid by low and moderate income (LMI) consumers who generally don't use debit cards to the more affluent ones who do. The comment period on the Fed interchange rule ended Tuesday and the agency received more than 4,000 communications from interested parties, including CUNA, state leagues, and credit unions. News stories have characterized the letters as predominately negative. CUNA, noting a myriad of problems with the Fed’s implementation plan, is seeking a delay from the anticipated July implementation date so Congress can “stop, study, and start over” on the interchange issue.