ABC picks up NAFCU interchange concern

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The following post is a re-print from the National Association of Federal Credit Unions.   NAFCU is a respected and influential trade association that exclusively represents the interests of federal credit unions before the federal government and the public. NAFCU provides its members with representation, information, education, and assistance to meet the challenges that cooperative financial institutions face in today’s economic environment. The association stands as a national forum for the federal credit union community where new ideas, issues, concerns and trends can be identified, discussed, resolved.

Dec. 21, 2010 – Concerns lodged by NAFCU over the negative impact on consumers, credit unions and other small institutions of the Federal Reserve Board’s debit interchange proposal continued to make news over the weekend.

ABC News ran a story online that pointed to retailers’ positive reviews of the rule, which would essentially result in a fee cap of 12 cents per debit card transaction. However, it also points to comments from NAFCU and other financial industry trades that this is an effective 85 percent cut in interchange fee income for debit card issuers, which “will negatively impact not just large card processors like Visa and MasterCard, but consumers as well.”

The debit interchange proposal is being issued under a requirement of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The law requires the Fed to come up with a debit interchange fee that is “reasonable and proportional to the issuer’s cost.”

The law exempts institutions with less than $10 billion in assets from the Fed’s interchange fee limit – whatever that turns out to be – but NAFCU believes the market will eventually enforce that limit on all providers.

House Financial Services Chairman Barney Frank, D-Mass., one of the lawmakers for whom the reform package is named, said the Fed’s proposal comes up short. Frank expressed concern that whatever savings are achieved will not be passed on to the consumer.

“Unfortunately the evidence we’ve seen elsewhere is that consumers don’t get any benefit,” he was quoted saying in news reports.

Frank has also expressed concerns the limit will hurt small banks even though they are technically exempt from that provision of the law.

Frank has written the Fed urging that small institutions and consumers not be adversely affected by the Fed’s debit interchange rule. Fifteen senators took similar action in the days prior to that, and Sen. Claire McCaskill, D-Mo., who voted against including the interchange language in Dodd-Frank, followed up with her own letter on Friday.

McCaskill noted specific concerns that the instructions provided in the law explicitly bar the Fed from considering overhead costs in setting debit interchange fees, in effect preventing debit card issuers from recouping the full costs of offering cards to consumers.

“[T]here are other ways of addressing disputes over interchange fees,” she stated. “Potential solutions could emphasize transparency and consumer choice, rather than setting interchange rates directly.”

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Finalized-FDIC Overdraft Guidance

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The FDIC guidance “reaffirms” a best practices document that was issued in 2005, and it creates specific risk-mitigation techniques that it expects regulated banks to implement.   The FDIC guidance does not apply to credit unions, however, with that said this guidance opens the door for others.
Herein are some specific risk-mitigation techniques:

  • Your board must be involved with its ODP program.  Expected; is regular oversight including an annual board review of an ODP program’s key features.
  • Reviewing ODP advertising to minimize confusion and to promote responsible use.
  • Monitor programs for excessive or chronic customeruse.  What is abuse? When a customer overdraws the account on more than six occasions where a fee is charged in a rolling twelve-month period.  If and when that occurs, the bank must undertake “meaningful and effective” follow-up action, which may include, for example:
    • Contacting the customer to discuss less costly alternatives; and
    • Giving the customer a reasonable opportunity to decide whether to continue fee-based ODP coverage or choose another available alternative.
  • Instituting appropriate daily limits on customer costs by, as an example, limiting the number of transactions that will be subject to a fee or providing a dollar limit on the total fees that will be imposed per day.
  • Considering the elimination of overdraft fees for transactions that overdraw an account by a small amount.
  • Considering the use of cost effective, existing technology, as appropriate (e.g., text message, e-mail, telephone or cell phone) to alert customers when their account balance is at risk of generating a fee for non-sufficient funds.
  • Reviewing check-clearing procedures and any third-party vendor to ensure they operate in a manner that avoids maximizing customer overdrafts and related fees through the clearing order.

The FDIC expects affected institutions to have their new risk-mitigation techniques in place by July 1, 2011.

The guidance will create downward pressure on bank ODP revenue streams.

If your credit union earns income from an ODP program, that income is now at risk.  How much is at risk is yet to be determined, but one may want to consider the following.

  • How much ODP income do you receive from smaller transactions. If the small dollar amount transaction cutoff for fees take effect, ODP fees from those transactions could go away.   What is the impact?
  • How much ODP income do you earn from consumers who are charged more than 6 ODP fees in any 12-month rolling period? If this applied to you, you’d have to reach out to them and show them alternatives. Let’s say only 10% of those consumers opted out of your ODP program. How much money would that be?
  • Do you clear items from largest to smallest in terms of dollar amount?  If you had to clear items based on the order received or by check number, how might that affect your income?
  • Imagine you implemented a daily limit of $25 or $50 for ODP programs.  How would that have affected your income in 2011?

Credit unions are member-centric organizations.  It is recommended those credit unions with an ODP program begin to  develop and deploy several of the risk-mitigation techniques above if they already have not.  That said, it is widely anticipated many executives will be revisiting this area once again.

A Lost Revenue Stream

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Changes to Reg. E, the financial reform legislation, and the uncertainties of the future, compel credit unions take decisive steps to protect their account relationships and their associated revenue stream.

Because of recent changes to Regulation E, all financial institutions, including credit unions, cannot charge a fee for overdrafts from everyday debit card or ATM transactions unless the account-holder has affirmatively consented.

If your credit union was unable to execute a well thought out opt-in program you may see a 50% or more reduction in overdraft fee income.

On Aug. 16, your account-holders’ debit cards started to be rejected     where they would have worked in the past. Account-holders view this as your credit union treating them badly and providing poor service. Let’s understand, they do not blame the federal government or the merchant who simply passes along the message that the card has been declined. They will blame the credit union for the embarrassment and any problems that arise from the card’s denial, like not being able to purchase groceries for the family.

This previously profitable account-holder is now embarrassed, upset and looks for another institution that will treat them better.

Consumers change institutions because they get mad at their current one.  Expect an increase in angry account-holders.

Significant revenue is “at risk” because of this one change to the regulation. Finding a solution to adequately address this problem should be at the top of a “to do” list. I know the “to do” is getting longer and longer.  There remains time to mitigate the effects, however, with that said, indecisiveness increases the likelihood of account-holder attrition and lost revenue.

Being ready to act when a cardholder has a point of sale denial, places the credit union in a better position to keep the account and its associated revenue stream.

Your debit processor can provide you with a denial report. The report should show those transactions that were rejected for a variety of reasons.

Your core processor should be able to provide you with a list of accounts showing which were opted-out automatically and which were opted-out because of an account-holder decision.

The key to here maintaining the revenue stream and member service is being able to combine the two lists and then develop a well thought-out message to your account-holders.  Education at all levels of the organization, especially platform staff, is critical for success.

If an account-holder failed to respond to the opt-in communication and then has a debit transaction declined, someone needs to reach out and contact then letting them know why the denial occurred. Your efforts achieve the following.

Contact me today to assist in developing and deploying a viable solution.

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