Comments on: The credit unions’ fight against interchange regulation A slice of lime in the soda Sun, 26 Oct 2014 19:05:02 +0000 hourly 1 By: oasisbob Sat, 12 Jun 2010 00:00:22 +0000 @wprosapiao, I share Felix’s sense of frustration about people talking past each other on this issue, I think your claim that “interchange RATES have not risen” is a great example.

Felix has even covered this in a past post, it’s simply inaccurate to claim that interchange fees haven’t risen: 10/01/05/the-interchange-fee-rip-off/

As much as people like to paint the interchange issue as being primarily about BIG business, or BIG banks, it’s about anyone (big or small) who issues cards or accepts them. This is a systemic issue that affects us all, and I’d argue it’s entirely appropriate to tackle it with financial reform.

In comparison to everything else being covered in the reform bill, are interchange fees really that complex?

By: wprosapio Fri, 11 Jun 2010 22:25:18 +0000 Hi Felix,

I’m from the Texas Credit Union League. I’m a little surprised that, as a board member of a credit union, you are unfamiliar with the role that interchange plays in your credit union.

Many mid size credit unions (under 500 million in assets) have card programs that break even under the current interchange rate. Certainly the bigger your card program, the more you can tolerate in terms of losses. But what happens for those mid size credit unions? They will end up having to charge for debit cards (while large banks don’t) or potentially stop offering cards.

As you can imagine the future for a credit union without debit cards for members will be grim – people simply expect this as a service.

Does your credit union offer free checking? Does it offer free debit cards? How does it manage to do that? I’d hazard to guess that interchange plays a role.

But there is another issue – shouldn’t there be a cost associated with a guarantee of payment? Consumers pay either interest or overdraft fees, credit unions pay for the cost of issuance, merchants (who used to eat BILLIONS in hot checks) pay for a guarantee. As for the saving being passed on to the consumer, I trust a not for profit like my credit union to do that (and they do – with a 10 cent rebate on any transaction).

Also, interchange RATES have not risen. What has risen is the % of transactions using interchange.

There’s a great story in the Houston Chronicle on this issue, perhaps one that will give you a broader view. ness/steffy/7046970.html

The bottom line is that interchange is complex and shouldn’t be tossed into the financial reform effort – at the 11th hour, without hearings, without debate, and with a lie (that credit unions are “carved out”).

By: GingerYellow Fri, 11 Jun 2010 12:51:03 +0000 The Office of Fair Trading in the UK has been investigating interchange fees for some time (I could go into the history if you want, but it’s pretty tedious). They put out a report a couple of years back which describes in detail the then policies of Mastercard and Visa and how they set the fees. No doubt there are some differences with how they operate in the US (particularly for debit cards, I would imagine), but it might give some insight.

By: oasisbob Fri, 11 Jun 2010 01:38:37 +0000 Bruce Schneier makes the excellent point that banking security often doesn’t improve unless financial institutions have incentive to do so, something which is often not the case.

Because of inflated interchange fees, banks have very little incentive to reduce debit fraud. Vantage CU has a misleading chart on their website which states that the CU is responsible for “100% of fraud losses”, while the merchant is only responsible for a “2% interchange fee.” What they don’t state is that that 2% entirely covers their losses many times over.

I’ve heard that a good rule of thumb is that debit fraud losses are ~5% of interchange revenue. It’s true that doesn’t take other costs into account (people to adjudicate the Reg E process, etc), but it puts things into perspective.

Also, it’s certainly not true that every CU has a group of dedicated card services employees. As anyone who has worked in a CU knows, you often wear multiple hats.

And the Reg E investigations? Often they’re perfunctory and not too involved. (Was a member double-charged at a restaurant? Write it off and move on. )

By: FelixSalmon Thu, 10 Jun 2010 21:08:41 +0000 Ademanaonge — May made pretty much the same point. To which I respond with exactly the same thing I said in response to the fraud point: show me the numbers. And, explain what’s so special about the US that it requires its interchange fees to be higher than anywhere else in the world, and rising, despite the fact that its banking system is actually quite efficient by global standards.

By: absinthe Thu, 10 Jun 2010 21:03:25 +0000 Even if they can demonstrate that losses are high and rising, making up for it via an instrument like this is going to be disastrous in the long run. There are other (better) ways to fund cards — this one’s only appealing because the customer pays for it in a bizarrely indirect manner, with some of that cost presumably tossed onto cash customers and merchants.

The duopoly is a problem only inasmuch as it makes structural change unlikely (i.e. the possibility that an entrant or player will achieve a significant foothold by pursuing a different business model / revenue structure). Even if there were more players, the merchants would have lousy market power. High interchange fees are in fact a result of strong competition — competing for banks means raising interchange fees. I can imagine this getting worse, not better, with more firms.

By: Ademanaonge Thu, 10 Jun 2010 20:48:08 +0000 Felix, I work for NAFCU, another trade association that represents credit unions. Losses are only one part of the equation, in my humble opinion. When a member wants to dispute a debit or credit card transaction, who do they contact? Not the merchant, although they may. They’ll contact their financial institution. Regulation E, which governs part debit card transactions, indicates that all a consumer needs to do to challenge a debit card transaction is to indicate that it was “unauthorized.” The financial institution then must do an investigation. In each credit union and bank that offers plastic, you’ll find “card services” employees that do nothing other than process these claims. And if the investigation turns up the fact that the transaction is unauthorized, even due to a member’s negligence with their debit card, the credit union is on the hook. The member gets their money back within certain limits. This is a huge cost involved with the card payment system that no one wants to discuss. There are other issues, but I think one rambling issue per comments should suffice.