A Solution to the Proposed Caps on Interchange Fees

Recent reports indicate that as a result of the Dodd-Frank Wall Street Reform and Consumer Protection Act, passed in 2010, the Federal Reserve is proposing rules that would lower interchange fees on debit card transactions to 12 cents per transaction.

As we begin a New Year, many credit unions are taking stock of how to move forward in the new regulatory and economic environment. In addition to the anticipated costs of implementing new regulations and uncertainty over the final outcome of financial legislation, there are concerns about the effects of low interest rates, depressed loan volumes and the potential loss of interchange fee revenue.

Recent reports indicate that as a result of the Dodd-Frank Wall Street Reform and Consumer Protection Act, passed in 2010, the Federal Reserve is proposing rules that would lower interchange fees on debit card transactions to 12 cents per transaction. And while the proposal, to be known as Reg 1.1, will not apply to credit unions with assets under $10 billion, many speculate that the cap will be implemented system-wide with merchants steering consumers to cards with lower fees; resulting in a significant loss of income for smaller institutions.

According to the new rule, which is set to go into effect on July 21, 2011, “the amount of any interchange transaction fee that an issuer may receive or charge with respect to an electronic debit transaction shall be reasonable and proportional to the cost incurred by the issuer with respect to the transaction.” The comment period on the ruling will end February 22, 2011.

While it is unclear whether or not any savings incurred by merchants from the fee cap will be passed to consumers, the general consensus is that the cap will cost the credit union community a significant amount of fee income. As credit unions continue to strive for healthy performance, this type of action, along with current economic conditions, could put exceptional results out of reach for many institutions.

When you take a step back and look at the regulatory and economic realities facing the industry today, it appears that there is an all-out assault on income. For that reason, it is imperative to implement proven revenue-producing products to stay viable. And while media coverage of this latest regulatory move suggests that financial institutions will most likely end free checking or introduce any number of new service charges, now is not the time to increase or initiate new fees that don’t provide value for your members.

A Compliant Overdraft Program Can Give Your Revenue a Healthy Boost

By implementing a guaranteed 100 percent compliant overdraft program, you can increase your non-interest income from 50 to 300 percent, while providing a value-added service to informed members should they ever make a mistake on their account or experience a financial emergency.

An effective overdraft solution, designed to supplement your product offerings, should also include features that improve your processes, not add to the workload of an already stretched staff. These include:

  • a complete, non-discriminatory Reg E opt-in strategy;
  • a simple, straightforward system to monitor overdraft accounts;
  • employee training on how to present the program to members;
  • assistance with all compliance issues, policies and procedures;
  • a structured process for communicating with program users that ensures transparency and keeps charge-offs to a minimum;
  • 100 percent core processor compatibility; and
  • a performance-based fee structure.

As we enter a New Year of uncertainty regarding restrictions on fees for financial services, make sure you offer products that will provide the most benefit for your credit union and your members.