The credit unions’ fight against interchange regulation
Yesterday saw an enormous lobbying effort from the credit union industry; John Magill, the chief lobbyist for the Credit Union National Association, told me that there were over 400,000 “contacts” with Congress this week. He was on the phone with Harriet May, the CEO of a big El Paso credit union, GECU, and the chairman of the CUNA board. She was trying hard to persuade me that credit unions are implacably opposed to regulating interchange fees, which she was prone to characterize as “government price fixing”.
I’m a fan of credit unions in general, but I’m suspicious of this lobbying effort. I’m on the board of directors of my local credit union, and I don’t think any of us are opposed to the Durbin amendment. May told me that some credit unions don’t care about this issue because they don’t issue cards — but we do, both credit and debit.
In any case, May’s main argument was that debit cards are expensive for credit unions, and that interchange fees help to offset that expense. “My debit card losses are high,” she said, “but they’re offset by the interchange”.
The problem was that she refused to say just how high her debit card losses were, beyond saying that she had to replace over 1,000 cards in the wake of the Heartland affair. Similarly, the official factsheet sent out by CUNA asserts baldly that “for most credit unions debit interchange currently covers somewhat more than the direct costs of providing debit services but is not disproportinate given their expenses and potential costs such as those relating to fraud”, without actually quantifying those costs.
When I asked whether the sensible response to fraud would be better security, through things like chip cards, rather than higher interchange fees to cover the ex post expenses associated with fraud, she said that she would welcome chip cards, and that she suspected that interchange fees would be lower if chip cards were introduced.
At the same time, however, she was at pains to point out that she wasn’t setting interchange fees, and that she wasn’t entirely clear on how Visa and Mastercard did set them: I would have to talk to Visa and Mastercard, she said, or to the Electronic Payments Coalition, to get a clear bead on how exactly interchange fees are set. As a result, she couldn’t or wouldn’t answer my simple question: since banks have proved themselves able to increase their revenues by raising interchange fees, what’s to stop them continuing to raise those interchange fees regardless of whether their costs are rising?
The fact is that the banks have worked out, over the past five years or so, that raising interchange fees is a great way of making money, more or less invisibly. As financial regulatory reform curtails their ability to make money in other ways, they’re going to look to interchange fees as a method of making up for revenue lost elsewhere — unless the Durbin amendment, or something like it, passes.
May’s stated reason for believing that U.S. interchange fees — which are already the highest in the world — won’t continue to rise indefinitely is that “merchants can work together with the card associations and we can work through it”. But the fact is that this is a game where the card associations very much have the upper hand: merchants aren’t allowed to group together in a negotiating bloc, and most of the time just have take-it-or-leave-it offers from the Visa/Mastercard duopoly.
What’s more, Senator Durbin himself has written forcefully to the CEOs of Visa and Mastercard, telling them in no uncertain terms not to disadvantage credit unions or other small issuers — who are specifically excluded from Durbin’s amendment.
So unless and until banks or credit unions can plausibly demonstrate that their debit-card losses are high and rising, I’m not going to have much sympathy with them. And I’m going to continue to believe that interchange rates are too high; that they should come down; and that absent any regulation, they’re going to continue to go up instead.