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Interchange Fee Reform Bills Are Lurking

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WASHINGTON-Despite the absence of currently pending legislation on interchange fees, some analysts are warning that will change as early as 2010.

Steve Salzer, chief strategic, compliance and legal officer for St. Petersburg, Fla.-based PSCU Financial Services, said the CARD Act of 2009 includes an authorization for a study of interchange. “In and of itself a study is not a big deal, but our concern is if the bill is passed and the study moves forward, it would be a basis for the merchant community to argue that interchange be regulated and the amount merchants pay be reduced,” he explained. “Given the active nature of the merchant community, we would be fearful that passage of the CARD Act of 2009 would be a basis for the merchant community to use that study to push their agenda.”

Jeff Russell, VP-strategic development for The Members Group, Des Moines, Iowa, said the division on the interchange issue is clear: merchants say the amount of money they pay to MasterCard or Visa to use the companies’ networks is too much; issuers say it is the true price of using an efficient payment network. “Legislation has been introduced to reduce interchange fees. The problem is, it really is a cost of doing business,” he asserted. “Credit and debit cards bring flexibility and protection and a guarantee of funds, but merchants don’t want to pay the cost of delivering that. Merchants are guaranteed to be paid on an approved, swiped transaction. If someone writes a check and it bounces, the merchant is out that money.”

Salzer agreed: “Interchange fees are fair. Retailers are claiming that lower interchange will lead to lower prices for consumers, but they will not commit to that or give specifics. By accepting plastic, merchants are able to get higher sales and reduce costs related to bad checks. The issuers assume the risk of default on plastic. Merchants don’t want to pay interchange rates, which compensate issuers for assuming that risk.”

Potential For A Negative Impact

There is potential for a negative impact on CUs’ bottom lines if legislation curtailing interchange fees is passed. “Non-interest income is big to credit unions, and interchange income is a big part of that,” he noted. “If interchange income were to be reduced, it would be a big impact. Also, consumers would see a reintroduction of fees, especially annual fees, to pay for costs such as fraud.”

It’s unlikely consumers will see the benefit of reduced interchange fee, Russell added. “I suggest not; it will just pad the bottom line,” he said, noting that he expects at least one new interchange-realted bill will be introduced this year.

“I predict a major fight in 2010 over interchange,” Salzer said. “The merchant community isn’t going away. The merchant community tested the waters in 2008, and we expect them to come back armed and dangerous next year.”

CUNA VP-Legislative Affairs Ryan Donovan said CUs should be concerned about the prospect of riders being attached to credit card bills currently before Congress that would have to do with interchange fees. “We are concerned merchants will try to add amendments that would cap interchange fees when the bills hit the House or Senate floor,” he advised.

CUNA is a member of a group called the Electronic Payments Coalition. Donovan said the coalition includes credit card issuers and others who have an interest in the payment system being operated fairly, such as the American Bankers Association and the Financial Services Roundtable.

“I’m not willing to concede there will not be legislation on interchange until the next Congress,” Donovan warned. “Merchants are not going to give up.”