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  • Writer's pictureW.B. King

Cornerstone Advisors’ Interchange Report Details How Government Controls Reduce Income and Security

By W.B. King


In a report commissioned by the Credit Union National Association (CUNA) and American Association of Credit Union Leagues, Cornerstone Advisors examined how debit card routing mandates and debit interchange price caps from Senate Amendment 3989 of the Dodd-Frank Wall Street Reform and Consumer Protection Act are impacting credit unions and banks.


“This study reviews the financial impact from existing and proposed regulations related to credit card payments. It also reviews how merchants have or have not passed savings to consumers from lower debit card fees and how they may respond to proposed regulation on credit cards,” noted Cornerstone Advisors’ Director of Research Glenn Grossman, who authored the report. “Finally, the study examines the impact to the banking industry and consumers from proposed regulation.”

The Scottsdale, Ariz.-based firm provides management and technology consultancy for banks, credit unions and fintech firms.


Providing a history of the Dodd-Frank Wall Street Reform and Consumer Protection Act that was passed on July 21, 2010, the report, “The True Impact of Interchange Regulation: How Government Price Controls Increase Consumer Costs and Reduce Security,” underscored the Durbin Amendment, Section 920 to the Electronic Fund Transfer Act (EFTA).


The legislation, the report stated, exempted debit card issuers with less than $10 billion in assets from the price cap component. A financial institution exceeding $10 billion in assets that issues debit cards is referred to as a “covered issuer,” while those under the threshold are “exempt issuers.”


“The intent of the $10 billion threshold was to differentiate between community financial institutions and larger banks and limit the impact on institutions committed to the financial well-being of their communities,” the report noted.


On Oct. 1, 2011, the final rule, known as Regulation II, implemented price caps to covered issuers as follows:

  • $0.21 per transaction.

  • Plus 0.05% multiplied by the value of the transaction.

  • $0.01 fraud-prevention adjustment for certain fraud protection procedures.

According the report, the dual routing mandate for debit issuers (Section 920(b) (1) (A) of the EFTA allows merchants to direct the routing of a card-present (CP) debit card transaction. On Oct. 3, 2022, the Federal Reserve updated this rule mandating that card-not-present (CNP) transactions support at least two payment card networks. This routing mandate, the report noted, applies primarily for digital or ecommerce payments with an effective effect of July 1, 2023.


“The research clearly shows that imposing a government mandate on interchange didn’t help consumers or small businesses the first time around,” Jim Nussle, CUNA president/CEO, said in a statement. “To keep credit cards accessible and safe, merchants must have equal responsibility to protect the data and systems that enable their quick and secure payments. Cutting credit card interchange with this new bill would help big box retailers avoid responsibility and put consumers at greater risk. We’ve seen the unintended consequences from the Durbin Amendment for more than a decade. Let’s not double down on a bad idea.”


Single and Dual Message Networks


According to the routing mandate, financial institutions that offer debit cards must provide at least two unaffiliated payment networks, the report stated. To this end, an issuer in the U.S. is required to have a contract with either a Mastercard or Visa-branded debit card. The Durbin Amendment also requires the issuer to contract with at least one additional payment network, which includes Pulse, NYCE and STAR. These organizations, the report noted, provided network services for ATM transactions before the establishment of Regulation II, but processed limited debit transactions.


“Routing mandates have resulted in an increased burden on credit unions and smaller community banks that have seen revenue cut by almost a third for single-message transactions, which represent the majority of debit transactions for an issuer,” the report stated. “By 2018, revenue from single-message CP transactions declined to a level that was nearly identical for both exempt and covered transactions; and exempt debit transaction revenue declined by 29% on single-message networks.”


The report found that in 2021 the distribution of debit traffic differed based on the characteristics of the issuer’s portfolio of customers.


Among the top 50 debit card issuers that were deemed covered institutions, the following patterns existed for how consumers’ payment volume exists:

  • 68% of debit purchases are signature-based transactions (dual-message networks).

  • 32% of debit purchases are PIN-based transactions (single-message networks).

  • Based on Cornerstone Advisors’ observations with exempt issuers, the purchase volume is closer to a 60%/40% split between dual-and single-message networks, respectively.

In 2011, before Regulation II was passed, there were roughly 7,300 credit unions in the U.S. At yearend 2022, that number had decreased by 34% to just over 4,800 credit unions, the report noted.

“What has grown by seven times is the number of credit unions over the $10 billion asset threshold. Since 2011 there has been sizable growth in both commercial banks and credit unions that had to face the revenue shortfall that accompanies crossing the $10 billion threshold,” the report continued. “The challenge with an asset threshold and, in particular, a threshold set at $10 billion is the wide variance in assets between credit unions and commercial banks. A bank and credit union may have similar debit payment volume, but the bank often has access to much larger assets.”


With larger banks often having far more commercial clients with higher assets than credit unions, the latter camp, the report offered, provides more retail offerings to members.


“Utilizing data from Cornerstone Advisors’ ‘Performance Vault,’ during 2021 to 2022, community banks have approximately 2.7 times more assets compared to credit unions with similar debit card volume,” the report continued. “While the asset disparity is not as large with bigger banks, credit unions are more assets constrained than similar [sized] banks.”


Asset levels, the report offered, can prohibit credit unions and community banks from some aspects of organic and strategic growth.


“In an examination of credit unions that are nearing the $10 billion threshold, it is often seen that they adjust their growth strategies to account for a significant loss in revenue once the price cap goes into effect,” the report stated. “Cornerstone research identified credit unions within this peer group that reduced their asset growth by nearly half compared to other credit unions. Many credit unions that surpass the $10 billion threshold will look to accelerate asset growth, which may include merging with another credit union.”


Since the passage of the Durbin Amendment, the consolidation for financial institutions under the $10 billion threshold has been significant, the report noted. Over 5,100 institutions, including 2,516 credit unions, have closed or merged in the span of 11 years.


“Nearly a third fewer credit unions exist today than in 2011 to serve their members and communities,” the report stated. “There are various contributing factors for these closures, but most institutions were merged into larger organizations as credit unions and banks sought to improve operations and expand their footprint to adjust for the reduced revenue tied to the Durbin Amendment.”


Durbin 2.0


An additional concern for many smaller community banks and credit unions is Durbin 2.0 (known as the Credit Card Competition Act of 2022). If passed into law, these institutions may realize a considerable loss of interchange fees. This, in turn, impacts their ability to adopt technologies to remain competitive that are often funded by interchange earnings.


The bipartisan legislation, first introduced in late 2022, is squarely aimed at breaking up the purported Visa-Mastercard duopoly. In an early June 2023 statement, legislators supporting the bill provided additional context.


“Large credit card firms have consistently demonstrated prioritizing self-interest over our constituents,” said U.S. Representative Lance Gooden, a Texas Republican, who co-sponsored the legislation. “The Credit Card Competition Act serves to address this imbalance and restore a healthy, competitive free market that operates in the interest of consumers.”


U.S. Senator Dick Durbin, a Illinois Democrat, explained that credit card swipe fees “inflate the prices that consumers pay for everyday purchases like groceries and gas.” To this end, he said it’s time to “inject real competition into the credit card network market,” which he added is “dominated” by Visa and Mastercard. According to the Federal Reserve, the two noted companies account for nearly 576 million U.S. cards, or approximately 83% of general purpose credit cards issued.


“This legislation, which builds upon pro-competition reforms Congress enacted in 2010, would give small businesses a meaningful choice when it comes to card networks, and it would enable innovators to gain a foothold in the credit card market,” said Durbin, who also serves as the Senate Majority Whip. “Bringing real competition to credit card networks will help reduce swipe fees and hold down costs for Main Street merchants and their customers.”


Cornerstone Advisors’ Grossman said if the proposed Durbin 2.0 legislation passes, “the negative impacts of regulatory whack-a-mole will be felt not just by consumers and banks,” but by merchants of all sizes.


“The proposed rules will likely produce several unintended consequences, including the reduction or removal of credit card rewards programs, less credit availability and lower credit limits due to revenue impacts,” he said.


Senator Roger Marshall, a Kansas Republican, who introduced the Credit Card Competition Act with Durbin, confirmed in a June statement that he has be given “assurances” that the bill will come to a floor vote by the end of 2023.


Cornerstone Advisors’ 30-plus page report offers additional insights, including findings on merchant and debit interchange savings, fraud prevention, banking growth (via credit card programs) and how future regulations will impact the important role credit unions and community bank play in the market.



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