The debit interchange war, which culminated in the Durbin Amendment to the sweeping Dodd-Frank financial reform bill that was passed last year, is typically seen as a huge win for the big-box retailers and it is. What is much less appreciated is the fact that the nation’s credit unions, which neither started the fight nor actively participated in it, emerged in its aftermath as big winners in their own right.
Now the entirely predictable attempts of Bank of America, Wells Fargo and the other big banks to make up for lost interchange revenues, and the just-as-predictable consumer outcry against it, are making the credit unions’ position even stronger and they are poised to reap the benefits that come with it.
Why Are Credit Unions Winners of the Interchange War?
The Durbin Amendment mandated the Federal Reserve to ensure that the fees card issuers charge merchants every time they accept a debit card for payment — the interchange fees — are “reasonable and proportional.” By the Fed’s initial reckoning this meant that issuers could charge no more than $0.12 per debit transaction, an enormous 70 percent decrease from the pre-Durbin average of $0.44.
Following some additional wrangling the limit was lifted to a compound rate that is made up of two separate per-item fees and a percentage rate, and averages $0.24 per transaction. At this point the huge 45 percent drop in interchange fees from their pre-reasonable average looked somewhat modest in comparison to the initial proposal.
However, it was decided that not all issuers were created equal. Financial institutions with less than $10 billion in assets were exempted from the interchange limit and could go on charging interchange fees at their pre-reasonable-and-proportional rates, which by the way are set by Visa and MasterCard for all transactions involving cards bearing their logos.
As most credit unions have less than $10 billion in assets, they can now charge merchants 83 percent more than their bigger competitors per debit transaction ($0.44 vs. $0.24), while at the same time stand ready to pick up a flood of new customers fleeing big-bank outrages in the form of various new debit-related fees.
How Are Credit Unions Doing?
Earlier this month the National Association of Federal Credit Unions (NAFCU) reported that:
Traffic to CULookup.com, NAFCU’s credit union locator site, continues to see growth in traffic, with a 350 percent increase in the two weeks since Bank of America and other banking giants announced plans to begin assessing debit-card and checking fees.
NAFCU did not release figures on the actual bank-to-credit-union conversion rate, but the trend has surely received a further boost by the Occupy Wall Street movement and projects like the “Bank Transfer Day,” scheduled by a Facebook group for Nov. 5 when bank customers are encouraged to move their money into a credit union.
Of course, credit unions are more than happy to get as much new business as comes their way. “Why wait [for Nov. 5]?,” asks Patty Briotta, NAFCU’s public relations manager. “We encourage people to explore their options and vote with their money every day and join a credit union.”
Bombarded with news of protests, occupations, bank transfer days, etc., one may be forgiven for losing sight of the issue that started the whole thing — the size of the interchange fees. It seems to me that the issue is a very simple one. If a fee charged by one bank to a retailer is considered too high, it should also be considered too high if another bank charges it to the same retailer. I really cannot see it any other way and I can guarantee you that retailers see it exactly the way I do.
Of course, the exemption of small banks and credit unions from the Fed’s interchange rule had a specific purpose, which was formulated by economist Simon Johnson as “level[ing] the playing field with larger banks to some degree.” Johnson called it a “smart political move.”
Whatever the real motives behind it, the Durbin Amendment is here to stay and everyone affected by it is now adjusting to the new environment. Even as Wells Fargo has now decided against charging a $3 debit fee, I still believe that eventually the big banks will manage to recoup their interchange-related losses, of course at consumers’ expense. It is also clear that in the short run we will see a surge of defections from big banks to credit unions. What remains to be seen is whether consumers will enjoy banking with credit unions.
One must feel the retailers’ pain, though. Having fought so hard for lower interchange rates, they can’t be happy watching credit unions taking market share from the banks. After all, from their point of view, a dollar is a dollar, whether charged by a big or a small bank.
Image credit: Wikimedia Commons.