Interchange Update: Bad News

From CUNA News Now, 6/22/2010

CUNA reviews House interchange alternative; urges CU opposition
WASHINGTON (6/22/10)--After an initial review of alternative interchange language offered yesterday by the House as a substitute to a Senate provision in the financial regulatory reform bill, the Credit Union National Association (CUNA) urged credit unions to continue working for improvements to interchange provisions.

"We will continue working for improvements in the interchange provisions, and we urge you to continue your efforts to oppose the inclusion of the interchange bill in the financial reform legislation," said CUNA Senior Vice President of Legislative Affairs John Magill.
CUNA also provided a brief summary of some key provisions of the new interchange amendment. They include the following:

• The Federal Reserve would write regulations on interchange fees and whether they are reasonable and proportional to the marginal costs incurred by issuers relating to a transaction. The Fed board would issue rules within nine months of enactment (probably around March/April 2011). The rules would take effect within a year. The costs would be limited to incremental costs of authorization, clearance and settlement plus costs related to preventing fraud;
• Credit unions and banks with assets of less than $10 billion would be exempt from the rate-setting rules directly. However, the extent to which this exemption would work in practice is unclear and subject to much debate;
• There is no enforcement mechanism to ensure merchants would accept lower interchange fees from bank debit cards and higher interchange fees from credit union debit cards;
• The amendment would prohibit issuers and networks from inhibiting the ability of merchants to direct the routing of transactions;
• Federal and state government benefits and reloadable prepaid cards would be exempt from the rate settings;
• The Fed would be authorized to require any issuer (including credit unions of all sizes) to provide information to the board regarding the regulation of interchange fees and must disclose aggregate information on costs and fees by issuers or payment card networks in connection with debit transactions. (This is a new provision about which CUNA is concerned. However, CUNA notes that if the Fed has to set interchange fees based on costs, it will be useful for them to include credit union data);
• In its rules, the Fed would have to consider the similarity between debit transactions and checks that clear the Federal Reserve System at par and to distinguish between the incremental costs incurred by an issuer for its role in settlement, clearance or authorization for a particular transaction;
• In writing the rule, the Fed board would have to consult with the National Credit Union Administration (NCUA) and other federal regulators;
• The Fed would also be directed to write rules on network fees to ensure network fees are not used to compensate an issuer or to evade the board's rules;
• The amendment does provide that merchant discounts for the form of payment (cash versus debit card, for example) may not differentiate on the basis of the issuer or network. Incentives for the use of credit cards may not differentiate on the basis of issuer or payment network and such incentives must be offered to all buyers and disclosed;
• Payment networks may not limit the ability of merchants to set minimum dollar values up to $10 for the acceptance of credit cards; and
• Merchants would not be able to discriminate between debit cards or credit cards within a payment network on the basis of the issuer.

CUNA will provide detailed analysis of any final interchange bill.