Nov 24 2010

Interchange Regulation: Implications for Credit Unions

Report  
Number  
224

A provision in 2010’s financial reform legislation is sending a tremor through the debt card ecosystem, directly affecting debit card issuers like credit unions.

Adam Levitin
Associate Professor
Georgetown University Law Center
Report Number 224

Executive Summary

When Jane Doe swipes her debit card for groceries, gas, or a book at the airport, little does she know that her behavior supports a whole ecosystem. The merchant certainly gets paid, but only after coughing up an interchange fee that supports the debit card network, the institution that issued the card, and sometimes even Jane herself in the form of cardholder rewards. But a provision in 2010’s financial reform legislation is sending a tremor through that ecosystem, directly affecting debit card issuers like credit unions.

What is the research about?

When Congress passed the Dodd-Frank Act in the summer of 2010, its main provisions—aimed squarely at large banks and other systemically important institutions—did little to affect the operations of credit unions. But one amendment, added late in the process by Senator Dick Durbin (D-IL), restricts a key source of many credit unions’ profits: debit card interchange. Despite lobbying against it, and an eventual waiver for financial institutions with assets of less than $10 billion, the Durbin Amendment passed in the final law. Pending the Federal Reserve’s implementation rules, due for comment in early 2011, it may be the act’s hardest pill for credit unions to swallow.

This report builds on similar research by Professor Adam Levitin of Georgetown University Law Center and the Filene Research Institute over the past year. As new laws and regulations have begun to change the face of credit union compliance, Filene has published the following reports: An Analysis of the Consumer Financial Protection Act (2010), Overdraft Regulation (2010), and The Credit C.A.R.D. Act (2009). Each seeks to explain the relevant new law and outline its challenges and opportunities for credit unions.

What are the credit union implications?

The Durbin Amendment will undoubtedly affect the profitability of current credit unions. Credit unions may have to adjust their bundling of services and prepare for a likely transition to mobile commerce. Overall, the amendment illustrates the challenges credit unions face in relying on fee- based revenue.

This report is sponsored by Card Services for Credit Unions (CSCU).