All Eyes on Interchange

As industry players await a GAO study on interchange fees commissioned via the recently passed Credit Cardholders' Bill of Rights (HR 627), credit unions are carefully watching to see what aspects of proposed legislation are likely to be enacted in the 111th Congress.


Two key bills in the House (HR5546) and Senate (S3086) had the potential to limit interchange fees by requiring electronic payment system providers and merchants to jointly negotiate fees and terms for access to the system. They also proposed the creation of a panel of judges to regulate the interchange network fees and terms. As industry players await a Government Accountability Office study on interchange fees commissioned via the recently passed Credit Cardholders' Bill of Rights (HR 627), credit unions are carefully watching to see what aspects of proposed legislation are likely to be enacted in the 111th Congress.

Industry Stakeholders Continue Their Advocacy Efforts

Industry players pressing for interchange fee restrictions include the Merchants Payments Coalition, which has run ads linking interchange fees to the subprime mortgage crisis. Their website,, currently requests that consumers "Tell Congress it can't fix the financial services industry without reforming huge, hidden credit card fees." The Merchants Payments Coalition includes a variety of merchant groups, including national and statewide organizations, such as grocery store retailers and restaurant groups. Their primary communication efforts link interchange fees to the current financial crisis, promoting the idea that these fees are a hidden cost for consumers, and that big banks benefit at the expense of small businesses.

On the other side is the Electronic Payments Coalition, which includes unions and credit union leagues/associations, banking industry organizations, financial service providers, and card network providers. Their efforts focus on education regarding the benefits of the electronic payments network to small businesses and consumers, and the operating expenses, such as fraud prevention , that are covered by these fees. Their website, explains the importance of interchange to community banks and how small businesses could be harmed by the interchange restrictions. It provides tools and information for consumers to contact their Congressional representatives to oppose the legislation. The website also includes an email list to sign up for legislative updates and participate in advocacy campaigns.

Developing an Action Plan

Credit unions should ensure that their Congressmen and Senators are aware of their opposition, providing detailed information on how it could threaten their business and impact their members.

Mark Caverly, of LGFCU ($850M, Raleigh, NC), points out that credit unions could be severely impacted by limitations on interchange income, "It will make it harder for smaller credit unions to successfully offer cards, as these fees help cover our costs to issue cards and enhance our fraud protection." Interchange fees lower costs to members by allowing credit unions to provide benefits such as lower interest rates and fees.

Both debit and credit cards are considered key relationship products that expand member convenience and help ensure that the members' primary transaction account is at the credit union. Caverly notes that, "In cases such as the Heartland Breach, we not only have had to shoulder the costs of reissuing cards but also the potential damage to our reputation, regardless of the fact that it was not our fault." LGFCU thus far has had to pay $150,000 to reissue cards, and to date has had losses of $13,000 in related fraud.

LGFCU is using the following points to illustrate their opposition to the proposed regulations:

  • Will impact credit union competitiveness: lower fees may mean that credit unions won't be able to compete with larger issuers
  • May lose an incredibly important membership building tool: Offering debit and credit help cement the member relationship
  • May no longer be able to offset the costs of offering the program: other fees may need to increase to control costs
  • Perhaps more importantly, consumers have much to lose: When Australia regulated interchange fees, a subsequent study found no benefits to consumers.
  • While retailers clearly benefited, prices did not go down, and consumers paid increased costs for credit and debit.

Credit unions should keep careful watch on this issue. Even if Congress doesn't address the issue this year due to the ongoing financial crisis, it will continue to be on the agenda in the future. The bill's supporters may try to attach these provisions to other related financial service industry bills.




June 1, 2009



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