NCUA Debit Card Analysis Validates Proposed Fed Rule

The information contained in the analysis is so misleading it casts doubt on NCUA’s ability to understand the issue and its impact on credit unions.


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:

  1. The reasonableness of the 12 cent cap for institutions with more than $1 billion in assets;
  2. 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.




May 2, 2011


  • Oh great. Drawing conclusions on a 10 year old study, of a product that has existed for less than 20 years. Surely NCUA cannot glean this kind of data from call reports.
    CU CEO
  • This is ridiculous, at this point even a really cheap transaction cost for just a pre-auth costs at the least 3.5 cents which is above the 2 cents they have listed this does not take into consideration telcom, and as the Debit Expert said fraud and associated programs that have just come into play in the last 3 years.
    EFT Specialist
  • Now?
  • If what is stated is true, that NCUA used data from 2001, that was the early days of the debit world. Fraud and other costs were much lower at that time. Debra Matz has now lost her credibility.
    Debit Expert
  • Great. Just great. Is NCUA trying to push the self-destruct button? Is there no filter on the information they decide to share?
  • Thanks for pointing out another area NCUA is simply clueless about.
  • This is extremely incorrect and damaging information that NCUA has presented. They have not taken into account nor considered that most CU's also allow free ATM access for our member accounts, Home Banking, Bill Pay, etc... which is taken into account along with debit interchange to support the basic checking program for our members. As of yesterday, it was announced that Chase, Citi & B of A are seriously looking at charging $3 - $5.00 on ATM withdrawals to make up for this potential debit interchange loss of income to support again...all the expenses to support checking accounts for the consumer without imposing really large monthly fees (which they've all already implemented). Question...where did NCUA obtain these numbers and was it even truly and properly validated?
    Grace Mayo
  • I don't know where the NCUA got their "direct costs" from but those aren't the costs in our credit union.

    Plus, it's not the direct costs -- but the "Indirect Costs" that are the most damaging --Fraud prevention; fraud losses; and card re-issues due to card compromises. Most of which are the result of the Retailer's continued failure to abide by data security requirements and willingness to accept knowingly fraudulent cards since they have no liability).

    I am afraid the NCUA's comments will have devasting effects on small credit unions and sincerely question NCUA's motives. Are they here to please Washington or represent all the credit unions?
    CU Manager
  • I'm so appalled and upset. This is unreal and almost unbelievable. I've done studies on our debit card program and we are close to a billion and they must not have including any costs except for direct processing and no actual or preventitive fraud costs ro re-issue costs. This is the most flawed study and could cause irreprehensible harm. How do we contact the NCUA!

    How are they calculating the assessments!!!
    Jason Scott
  • Our "Indirect Costs" are the ones that cause us the most harm in our debit program, fraud prevention, insurance and actual loss. Card re-issues due to the failure of Washington to reign in retailer's lack of data security. We basically offer debit at barely break even. I agree with many of the other comments that the NCUA's flawed analysis will cause more harm than good.
    Kathy Cranage
  • Why should anyone be surprised! As Chip speculates NCUA does not know the issues and/or impact of the Debit Card Interchange proposal on credit unions yet they way in with a study that is worthless.
  • I'm with you Jason. In one fail swoop NCUA has taken away all our work we put into fighting the cap on interchange. The data is terribly flawed and it shows how out of touch NCUA is with the credit unions they serve.

    I think I am on my forth reissue of cards in past year due to the lack of security on the part of merchants. They have to take these type of "indirect costs" into account.
    VP Internal Operations