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Unintended Impact of Debit Card Interchange and Overdraft Fee Regulation – Where Do We Stand Now?

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BY NORM PATRICK & VLADIMIR JOVANOVIC

Are recent changes in interchange and overdraft regulatory oversight negatively impacting your credit union’s non-interest income? This set of recommendations will help your CU respond to such changes in proactive ways that will help not only mitigate the downward pressure on but also safeguard one of your most important revenue streams.

Did you know that revenue from debit card interchange and overdraft fees often accounts for over 50 percent of a given credit union’s total non-interest income? Heading south for many credit unions of all sizes, debit interchange has been suffering due to regulatory changes implemented in 2011 that impacted interchange rates and networking routing practices. It’s imperative for credit unions to fully understand what is happening and why across the regulatory landscape. Armed with such understanding, they must then work closely with their processing and networking partners to determine steps to grow revenue and reduce operating expenses so as to offset the regulatory risk.

The Consumer Financial Protection Bureau is also looking to further regulate overdraft practices beyond the changes to courtesy pay practices that were implemented in 2010. Regulatory risk continues to persist relative to both of these two important income streams.

Here is a look at how we’ve arrived at the place we are today and some recommendations for how credit unions can respond to protect their non-interest income.

The Story So Far

Debit Interchange

As directed by Congress through the Durbin Amendment, the Federal Reserve Board (FRB) introduced Regulation II in October 2011 with the intention of adding competition and fairness to debit interchange fees and transaction routing. Institutions with total assets of $10 billion and above had their debit card interchange revenue capped and had to accept a blended interchange yield drop of over 52 percent. The FRB also included provisions that protected small issuers – those with assets of less than $10 billion – by excluding them from the interchange rate provisions. Nothing in the final rules, however, explicitly requires the networks to maintain favorable interchange rates for institutions under the $10 billion in assets threshold.

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