Interchange Bill Would Take its Toll on Credit Unions and Member Service

Reduced interchange and competitive disadvantages pose significant challenges
Earlier this month, senators and members of the House of Representatives reintroduced legislation that credit unions have staunchly opposed: an expansion of the Durbin Amendment to credit cards. The bipartisan Credit Card Competition Act would introduce similar price controls and routing requirements on credit cards as are already imposed on debit cards.

CUNA joined forces with NAFCU (you know this is important!) and the leagues to write members of Congress in an effort to stop the bill. Despite the assertion by retailers that they will pass the savings on to consumers, we know this is false, because after the debit card interchange caps passed “98.8% of merchants failed to pass-through savings realized from debit regulation to consumers, and over 20% actually increased their prices.”

The issue has been a tricky one for credit unions to navigate, because credit union credit card issuers are the human shield to the largest issuers, whose practices do not always align with credit unions’. Yet, the larger demonstration of strength is practical to combat the largess of the big-box retailers’ coffers.

The letter from the credit union trade groups continues, “While the bill contains a cynical carve-out for smaller institutions, we all know that regulating the largest institutions and payment networks forces changes to the whole credit card payments ecosystem. As a result, finding the resources to pay for technology updates and reissuance of cards becomes much more difficult for smaller institutions while driving fee increases everywhere else.”

On top of that, swipe fees are intended to cover the cost of fraud detection, credit monitoring and fraud, yet retailers would be able to choose the cheapest path, and guess who will be at the other end of the line when member come calling about their card data being used fraudulently? It’s your credit union. Damaging your members’ trust and your credit union’s reputation over something you could not do anything about. Your credit union would take on additional risk it did not choose to for less income if the legislation passes. At the same time, losses from card fraud accounted for nearly $6 billion in the US alone, and is projected to accumulate more than $165 billion in fraud over the next 10 years.  

Those pushing the legislation seem to not understand cause and effect and it’s maddening. The fact that it’s bipartisan is frightening.

Interchange’s impact on credit unions

Credit unions face a double-edged sword as reduced interchange fees and competitive disadvantages put their viability and ability to serve members at risk. While a carve out exists for credit unions and community banks of less than $10 billion in assets, in practice the result is decreased interchange income for all. According to NAFCU, interchange revenue declined by 10% for credit unions and community banks since the original Durbin Amendment, totaling more than $100 billion.
The financial strain caused by reduced interchange fees has credit unions seeking alternative sources of revenue to maintain their operations. Diversification becomes paramount, with credit unions exploring expansion into other areas of business. By broadening their product offerings, credit unions aim to generate additional income streams and reduce their dependence on interchange fees.

At the same time, credit unions have faced rising rates that are putting a damper on lending. The significant reduction of interchange income will force credit unions to become even more balance sheet sensitive unless they strategically focus on other areas on noninterest income.

Smaller credit unions that often operate with fewer resources and tighter margins could be particularly affected – not ‘carved out.’

Impact to credit union members

Unfortunately, the negative impact of interchange legislation extends beyond credit unions to affect their members. To offset the decrease in interchange income, credit unions may be forced to introduce new fees or increase existing ones. Members could experience new or higher account maintenance fees, ATM withdrawal charges and reduced rewards programs. The very essence of credit unions, centered around member satisfaction and community support, is at risk as these changes can lead to a decline in member loyalty and trust.

This at the same time the CFPB is trying to eliminate overdrafts and NSFs, and even late fees on credit cards! While some issuers can certainly be abusive, the CFPB states in its own research that community banks and credit unions have kept their rates lower than the big banks and issuers that push the bounds of the law.

Way to swat that flying with an axe.

What credit unions are doing to mitigate the legislative and political risks

Credit unions are actively engaging in advocacy efforts to influence interchange legislation through their trade associations and public relations. By educating legislators and policymakers about the unique challenges they face, credit unions strive to shape fair and balanced regulations that consider the impact on their financial viability, member services, and overall contributions to the community. Active participation in industry associations and collaborative advocacy efforts are instrumental in ensuring credit unions' voices are heard.

Mary Beth Spuck, CEO at Resource One Credit Union, a CDFI in Texas, wrote in the Dallas Morning News, “Our member-owners tend to be culturally diverse people of modest means. They depend on us for access to credit, including mortgages, at affordable rates; low- or no-cost checking and savings accounts; and counseling that can help them achieve financial well-being. The current interchange system makes offering those services financially viable. The Credit Card Competition Act, by contrast, could force us to raise interest rates, implement additional fees on credit cards, curb outreach efforts to underserved communities, or pull back on the extension of credit altogether.”

The $811 million credit union lost half-a-million dollars in 2021 due to fraud, according to Spuck, and that’ll only go up if the legislation is passed.

Credit unions are also working to tamp down the negative impact of interchange legislation through collaboration and partnerships to leverage economies of scale. CUSOs and other business partners enable credit unions to pool resources, share expertise and offer a wider array of services to their members. Embracing technology and innovation is another crucial piece to the puzzle.

As credit unions continue to navigate the challenges presented by the folks in Washington, their ability to adapt and respond strategically will determine the cooperative movement’s long-term viability and the level of service they can provide to their members. Lobbying is a great start, but seeking out alternative revenue streams, forging partnerships and embracing technology can go a long way, too.