Proponents and opponents of the Federal Reserve's proposed interchange fee cap of 12 cents per debit card transaction are digging in their heels. The National Retail Federation is pushing for the limit to become law; financial institutions and their trade associations are lobbying for a higher cap or no cap at all. An interchange fee is the amount -- 44 cents per transaction, on average -- a retailer pays in order to accept your plastic. Interchange fees are set by payment card networks such as Visa and MasterCard.
Credit unions have sided with the banks. This is counterintuitive at first glance because the Fed's proposal would exempt institutions with less than $10 billion in assets, and only three of the Credit Union National Association's members, or CUNA members, fall above this threshold. Smaller banks and credit unions would still be able to charge more for debit card transactions. But CUNA president and CEO Bill Cheney says he believes merchants would reject a two-tiered system and credit unions would effectively take a loss on every debit card purchase made by a consumer.
"We acknowledge that there needs to be reform of debit card interchange fees, but the way it's being done is not a win-win situation," he says. "We've crunched the numbers. Twelve cents doesn't cover the cost" of a debit transaction, he says, putting the number at 25 to 35 cents per transaction.
Currently, network providers stipulate in their merchant agreements that merchants can't cherry-pick which cards they'll accept; in other words, if a store wants to accept one Visa card, it has to accept them all. But this kind of protection isn't written into the legislation; Cheney predicts that big banks would use their marketing clout and greater resources to find a way to convince merchants to accept their customers' debit cards over credit union cards. "We don't think the carve out's going to work," he says.
Cheney also says that a provision in the Fed's proposal concerning how debit transactions are routed would cost credit unions and cripple their ability to be competitive. Currently, the bank or credit union gets to choose the network that acts as a conduit between the merchant and the institution. As per the suggested legislation, merchants would get to pick and financial institutions would be required to give them more than one option, a process Cheney says would create undue financial hardship for his member credit unions, especially smaller ones.