The Winds of (Inter)Change

The passage of the financial reform bill will have a lasting effect on credit unions.


Last night’s passage of the financial reform bill will have a lasting effect on credit unions. Although our industry was not directly targeted by the media, consumers, or the Senate, as financial institutions we were inevitably swept up in the reform. 

The final bill won’t appear for at least a month, but credit unions should prepare for the eventual re-pricing of interchange. The Durbin Amendment specifically targets interchange rates at financial institutions with more than $10 billion in assets, but any movement on the issue will have a broad reach. According to Callahan’s most recent Non-Interest Income Survey, credit/debit interchange and fees accounts for 31.4% of credit union non-interest income.

On Thursday, Callahan hosted card program consultant Tim Kolk for a webinar on credit card measurement and profitability. Key takeaways from the event will become more important in a post-reform environment. 

First, evaluate your profit and loss statement at the product level; this is key to understanding the effects of a different interchange structure. After legislation is passed, interchange will likely take the form of one of these three scenarios:

  1. Interchange could remain unchanged for credit card issuers. Kolk does not think this is likely, so look at your P&L and you’ll be in a better position to make decisions in any regulatory environment.
  2. There could be a blanket reduction of interchange rates, for example from 1.7% on average to 1%. Your P&L evaluation gives you a map to determine what this cut will eventually cost your member segments and product types. By understanding the financial affect, you can craft a careful, rational reaction when changing terms for members.
  3. The most likely scenario involves merchants being given the discretion to change the terms of what cards they accept at their store – whether setting minimums or maximums, offering discounts for cash, or only accepting certain types of cards. In this scenario, the interchange rate remains the same, but purchase volume will change.

Each of these scenarios has a first-tier impact on income and will have an effect on credit risk, balances, and revolve risk. If you want to build an accurate and lasting P&L statement for your credit card portfolio, check out Kolk’s latest presentation on CUtv next week.