Last week I wrote a little bit about how a Dodd-Frank provision exempting small banks and credit unions from limits on debit fees would help credit unions keep offering free checking accounts and debit rewards while accountholders at big banks lose out.
But Fred Becker, President and CEO of the National Association of Federal Credit Unions, believes the new law will hurt, rather than help, credit unions. Here are his three biggest beefs, and how they could negatively impact credit union members.
1. The two-tier payment system being developed by Visa that allows credit unions and small banks to get around limits on how much they can charge merchants for processing debit transactions won't hold.
Becker doubts retailers will be willing to pay more to credit unions for debit transactions in the long term. To get around it, he says, they'll steer customers away from credit union debit cards.
Even if that's not enough to kill the two-tier system, Becker and Dillon Shea, Associate Director of Regulatory Affairs for the NAFCU, doubt big banks will stand for Visa handing credit unions a competitive advantage in the financial marketplace.
"In the long term, there's certainly a possibility there will be downward pressure from those larger institutions that control Visa, in terms of questioning why they're going to continue a system that gives better rates to smaller institutions than (larger institutions) get," says Shea.
2. Regardless of what happens with the two-tier payment system, credit unions will bear a heavier compliance burden because of Dodd-Frank. Compliance costs are what financial institutions spend on to make sure they're complying with regulations and can prove it to regulators.
Credit unions aren't unique in facing higher compliance costs as a result of Dodd-Frank -- nearly every financial institution says they'll have to spend more time and money keeping up with new regulations from the Consumer Financial Protection Bureau and other financial regulators -- but Becker says credit unions will be hit particularly hard.
That's because, like a lot of financial institutions, many credit unions are still trying to make up for losses they suffered in the housing and commercial real estate markets as the real estate bubble burst. Any increase in operating costs will only add to their financial burdens in an already difficult business environment, especially since credit unions don't benefit from the types of mammoth investment arms keeping some large institutions afloat.
Bottom line: Along with what Becker believes is an inevitable collapse in debit card interchange revenue, added compliance costs could put further pressure on smaller credit unions and force them to implement new fees or reduce benefits for members to remain viable.
3. There won't be a net benefit to consumers in terms of lower retail prices, because retailers will simply pocket the savings from lower debit fees. "If the intent was to protect consumers, than the Walmarts of the world would have had to reduce their prices concurrently with their savings," Becker says.
He doubts competition among retailers will be enough to make them lower prices by the amount they save on debit card transaction fees thanks to Dodd-Frank.
Bottom line: Credit union members forced to pay new fees may not see those fees offset by lower retail prices.
I think Becker has some valid points here. The two-tier system will be a thorn in the side of both large retailers and large banks, two incredibly powerful forces in the U.S. economy, and it's easy to see them successfully pressuring Visa to remove it.
Becker's point about being forced to charge accountholders higher fees also carries some weight here. It's one thing to hear Chase, a company that just reported a $17.4 billion annual profit, claim they'll have to raise fees on checking accountholders to save their business.
But when you hear not-for-profit credit unions making this argument, you know they're not just trying to justify padding their bottom lines with increased fees; you can be fairly sure they're actually concerned for their members and don't want to charge them higher fees.
Still, I'm more hopeful than Becker that retailers will pass on the benefits of reduced debit card fees to consumers. The retail sector is really, really competitive, and I don't see discount stores missing an opportunity to slash prices and undermine their competitors now that they have some breathing room from debit card interchange fees.
What do you think? Are credit unions right to complain about Dodd-Frank? Do you think retailers will lower prices now that they pay less to accept debit card payments?