In an April 29 letter to Fed Chairman Ben Bernanke, NCUA Chairman Debra Matz included data that attempted to show how the Fed’s proposed rules hurt smaller credit unions. However, the analysis submitted actually confirms the reasonableness of the rule.
A Scrubbed Data Analysis
NCUA based its comments on an early March 2011 study of the direct costs of debit card programs at 296 credit unions. The review did not “incorporate data related to indirect costs … NCUA staff also excluded outliers, reporting errors, and incomplete data when such information appeared to skew the analysis and outcomes … NCUA staff has compiled, scrubbed, and analyzed this data.”
What the NCUA Data Shows
NCUA’s data shows the “direct costs and income related to debit card transactions” for credit unions with more than $1 billion in assets are two cents per transaction (this is significantly lower than the Fed’s proposed 12 cent cap), and each, on average, generates 38 cents in revenue. This provides a 36 cent gross operating margin.
NCUA’s letter said the merchant routing restrictions could significantly increase the fixed and variable costs for small institutions, “resulting in an inability to remain competitive with larger institutions.”
However, the data presented by NCUA for institutions with less than $50 million in assets shows they are already noncompetitive. The gross margin for credit unions with $10 million and less in assets is zero. That is, no operating income. For the next peer group of credit unions with $10-50 million in assets, the margin is 6 cents.
With these numbers, the retailer coalition could possibly show:
- The reasonableness of the 12 cent cap for institutions with more than $1 billion in assets;
- Smaller issuers are already noncompetitive under the current system and the proposed rule, whose intent is to maintain the status quo for institutions with less than $10 billion in assets, will not change that fact.
What the NCUA Data Means
In short, the data suggests NCUA does not understand the issue and its analysis might have the opposite effect of its intent.
The political debate on the debit rule is voluble. The ability to frame objective questions on the issue is increasingly rare, but here are a few general points about the debit price cap debate:
- Debit cards are not a stand-alone product. A profit and loss analysis would, at a minimum, include the share draft account data and probably a full relationship P&L.
- Costing as a basis for product analysis is an arbitrary concept. Does “cost” mean average cost, marginal cash cost, fully allocated cost, etc? Some would maintain that credit unions are an integrated factory; therefore, it is impossible to trace costs, no matter how well defined, to a specific product or transaction.
- Regardless of the approach of analysis, the impact of a debit pricing change varies for each institution. It depends on the amount of debit income in gross revenue, the mixture of pin and signature debit transactions, the operational model, network partners, and product configuration. At a minimum, analysis needs to extend beyond the pure transaction and include other income such as overdraft fees.
NCUA’s analysis reflects a flawed assumption that it can accurately or fully account for unit costs of a debit card. Such analysis does not address the critical issue of what “cost” means. It also does not address how one institution, in a networked transaction environment, identifies “fully loaded costs,” especially those outside the boundaries of a firm’s accounts.
The pricing of debit cards has been politicized. Retailers are attempting to gain influence with the processing networks that have exercised the dominant economic position. Instead of adding to the understanding of the issue, the NCUA letter appears to be another political statement.
NCUA has unwittingly joined the debit debate in a way that has limited outcomes. Either the retail coalition will use the data to validate the proposed rule, or, because the information is so misleading, NCUA will cast doubt on its own ability to understand the issue and its impact on credit unions.
Neither result helps credit unions.
* The article was updated to reflect a typo in the second paragraph. The study is from March 2011.