I think bankers knew the regulatory rules that would come out of the Dodd-Frank Act would be bad, but I don’t think anyone expected it to get downright ugly so quickly. On Dec. 16, the Federal Reserve submitted a proposal for interchange fees and its harshness caught the industry off guard. The Fed proposed two alternative interchange fee standards: (1) an issuer-specific standard with a safe harbor and a cap; or (2) a cap applicable to all issuers. Either way, there is a cap of 12 cents per transaction. The Fed estimates that this will reduce debit interchange fees received by issuers by more than 70 percent, but others predict the proposal could cut those fees as much as 90 percent.
The American Bankers Association called the proposal “bad public policy.” The Independent Community Bankers of America said it was “naďve” to think the bill won’t hurt community banks despite supposed exemption of those with less than $10 billion in assets. Even credit unions are in agreement with banks, for once. The Credit Union National Association said the proposal will have a “horrendous impact” on credit unions. In its statement released shortly after the Fed submitted its proposal, CUNA said, “any significant reduction in interchange income will require higher fees paid by consumers. Thus, consumers will be left paying for the bonanza to merchants — which is not what Congress intended.”
But just how will customers pay? Some speculate bank issuers will focus on moving consumers back to unregulated credit cards and charge cards. Others believe banks will charge consumers a fee every time they make a debit purchase in an effort to create more transparency. Some expect banks to increase cash, check and ACH processing fees. And then, of course, there has been much talk about eliminating free checking, which some large banks have already discontinued. After free checking, others think online bill pay is likely the next service institutions will stop offering for free.
One possible option that wouldn’t necessarily cost consumers: mobile payments. In a survey released in November, Credit Suisse stated, “As regulatory pressure affects debit-interchange fees, mobile payments could create new revenue sources from value-added services, reduce the cost of servicing clients, and direct payment to higher or lower interchange products.”
No one really knows what the Fed’s final rule will look like and how the industry will adjust in response, but to learn more about the Fed’s proposal, what people are saying about the proposal and its potential effects on the community banking industry, go to the January issue at BankNews.com and click on this column.
Kari English is senior editor of BankNews.
Copyright © January 2011 BankNews Media