/Cheney+summary+of+Fed+Interchange+proposals

CUNA President/CEO Bill Cheney’s Quick Summary I wanted to provide you with our quick summary and my initial reaction to the proposal issued today by the Federal Reserve Board regarding the regulation of debit interchange fee income. While the Fed has made efforts to address some of our concerns, the new proposal raises many issues we will be working on to improve and resolve.

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The proposal is out for comments until February 22, 2010. Initially, we had heard it would be out for 30-day comments. This 60-day period will give us reasonable time to mobilize and direct comments to the Fed and to Congress, although we won’t have any time to waste. FYI, at the meeting today, staff indicated they will have difficulty finalizing the rule by April 21, 2011, the statutory date for implementing the provisions to regulate debit card fee rates.

The proposal does include the exemption for small issuers of $10 billon or less in assets but does not include provisions to enforce it. While this is not totally surprising, since the Durbin Amendment to the Dodd-Frank Act did not include enforcement provisions for the small issuers’ exemption, we believe the Fed has authority to reinforce the exemption and help make it work; we will continue to press the Fed on this point.

While we have indications that networks are working on implementing a two-tiered system, there is nothing in the proposal that directs this result.

We will be working on this as well.

The proposal is seeking comment on two alternatives to implement the Durbin Amendment’s rate setting provisions that limit the amount of a debit interchange fee to the “reasonable and proportional costs” incurred by the (large) issuers for debit card transactions. This is important for the three credit unions that are under the rule but also for all credit unions issuing debit cards, if the establishment and maintenance of a two-tiered structure cannot be assured.

For both alternatives, allowable costs will be limited to those related to large issuers’ costs associated with authorization, clearance and settlement of the transactions. Under alternative one, an issuer may calculate those costs and develop a standard for its fees, but fees would be capped at 12 cents per transaction; there would also be a safe harbor that the issuer could use instead of calculating its costs, but that would be set at 7 cents per transaction. The second alternative is just to have a per transaction rate cap of 12 cents. The Fed would review the rate limits every two years.

The Fed punted on the issue of fraud prevention costs, which can be used to adjust interchange fees under the Durbin Amendment, but it is seeking comments on how fraud prevention costs should be factored in.

Even if a two-tiered system is permitted, if the provisions on routing and exclusivity under the Durbin Amendment that allow merchants to choose

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how debit card transactions are processed are not implemented properly, small issuers will be disadvantaged.

The proposal is seeking comment on two alternative approaches. One would allow the issuer to provide debit cards that can be used over two unaffiliated networks, which could be one PIN-based network and one signature-based network. While CUNA opposed credit unions having to join additional networks if it could be avoided, we had recommended this alternative if necessary to satisfy the Durbin Amendment requirements.

The second alternative would require two unaffiliated signature networks and two unaffiliated PIN networks. We do not agree that this alternative would be consistent with the Durbin Amendment.

The proposal is 177 pages long and was just released this afternoon. We will be developing a more thorough summary and will post it on our Regulatory Advocacy website as soon as it is available.

There is no question that the Fed has been placed in a very difficult position by the Durbin Amendment and we want to continue working with the Fed and our Interchange Working Group to pursue credit unions’ concerns.

There was a dialogue today at the Fed’s meeting between Governor Duke and Fed staff that will be helpful to small issuers as the conversation clearly demonstrated that the Fed is concerned about the impact of the proposal on small issuers. It also demonstrated that it will be very difficult to implement the Durbin Amendment in a manner that does not harm small issuers, and ultimately consumers, because of the restrictions in the statute. We will be emphasizing this discussion with key Members of Congress, including the 13 Senators who sent a letter to the Fed last week urging them to consider the impact on small issuers, including credit unions.

I want to assure you that CUNA will continue to do all we can to minimize the impact of the Durbin Amendment and to achieve a regulation that is as favorable as possible for credit unions. We will also continue to work with the networks to advocate for a two-tiered structure that will actually work. In addition, we have continued our media outreach efforts, including a national press conference held just this afternoon in conjunction with the Electronic Payments Coalition attended by, among others, the Wall Street Journal, Washington Post, Bloomberg, AP, Reuters and USA Today (a copy of my written press statement is below). .

We will be initiating Operation Comment next week and will be urging all credit unions and credit union-related organizations to comment to the Fed on this proposal.

Please let Mary Dunn at mdunn@cuna.coop, or me at bcheney@cuna.coop know if you have any questions about this summary.