NEWS, EVENTS, PUBLICATIONS & EMERGING ISSUES

SW&M EMERGING ISSUE
July 30, 2010

NEW FINANCIAL REFORM ACT'S EFFECT ON INTERCHANGE TRANSACTIONS FEES

While the sweeping changes made under the new Act cover many areas, a number of our clients have inquired as to the effect of the so-called “Durbin Amendment” relating to interchange fees in the “Consumer Financial Protection Act of 2010” (the “CFPA”), which is included in the Act at Title X. We note that although regulations under the Durbin Amendment are not required to be issued for at least nine months, credit unions will have to keep the Durbin Amendment in mind when making strategic decisions that may be affected by the changes in interchange transaction fee requirements.

Among other things, the Durbin Amendment requires the Board of Governors of the Federal Reserve System (the “Board”) to issue regulations within nine months after the CFPA’s enactment to establish standards as to “reasonable and proportional” interchange fees for an electronic debit transaction. Issuers subject to the Board’s interchange fee regulation will only be permitted to receive or charge an interchange transaction fee for electronic debit transactions that is “reasonable and proportional to the cost incurred by the issuer with respect to the transaction.” However, we note that this “reasonable and proportional” interchange fee requirement does not apply to an issuer that, together with its affiliates, has assets of less than $10 billion. Consequently, many credit unions may be exempt from the “reasonable and proportional” interchange fee regulation, although there has been speculation in the industry that the regulation may result in merchants providing consumers incentives to use a debit card or network subject to a lower interchange fee (most likely debit cards issued by larger issuers subject to the “reasonable and proportional” fee regulation). In this regard, we note the Durbin Amendment prohibits a merchant favoring one issuer’s debit card or one payment card network over another in relation to incentives provided to consumers, and also prohibits merchants discriminating between cards within a payment card network based on the issuer. Nevertheless, it remains to be seen what effect the changes will have on the market, particularly with respect to smaller issuers’ interchange fee income.

In addition, the Durbin Amendment will allow merchants to provide incentives to consumers for payments by the use of cash, checks, debit cards, or credit cards, provided that the merchant does not favor a particular debit or credit card issuer or payment network over another. This provision under the Durbin Amendment applies to all issuers (not just those with assets of at least $10 billion). If merchants incent consumers to pay by cash or check to avoid paying an interchange fee to an issuer or payment card network, as is anticipated, issuers may very well see a reduction in their interchange fee income as a result.

The Durbin Amendment also requires the Board to issue regulations within one year after the CFPA’s enactment prohibiting issuers and payment card networks from certain restrictions as to the number of payment card networks on which an electronic debit transaction may be processed. Specifically, the regulation will prohibit issuers and payment card networks from restricting the number of payment card networks on which a debit transaction may be processed to: (a) one such network; or (b) two or more such networks that are affiliated with the issuer or are owned by affiliated persons. We understand that this restriction could likely affect, for example, credit unions that have entered into an agreement with a payment card network under which debit transactions will be processed exclusively on a single network.

As a result of the numerous changes made under the CFPA, credit unions will need to be mindful of how the CFPA may result in reduced interchange fee income and debit card transaction volume and consider implementing strategies to offset any reduction in interchange fee income. In addition, those credit unions considering entering into agreements (or which have already executed an agreement) with a payment card network may wish to consult their counsel as to the possible ramifications of the CFPA and any regulations issued under the CFPA on such a contractual arrangement, as it is our experience that agreements with payment card networks commonly require the issuer to attain certain “targets” as to card transaction or interchange fee volume. Our office is happy to assist our credit union clients with questions relating to interchange fee income issues, or other questions arising under the CFPA and/or the Act.

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