Visa Commits to a Two-Tier Debit Card Interchange Structure

In an apparent effort to calm its smaller debit card issuers, Visa Inc. says it will develop a two-tier interchange schedule, one with regulated rates arising from the Dodd-Frank financial-reform law and the other with unregulated rates applicable to banks and credit unions with fewer than $10 billion in assets.

“We have said that we will support a two-tiered debit interchange structure,” a Visa spokesperson said late Friday in a statement.

The Credit Union Times' online news service reported Friday that Visa held a Webinar Thursday for credit-union and network executives, during which a Visa executive said the unregulated schedule would be similar to Visa's existing debit schedule. Visa did not comment about the report.

Only three credit unions have more than $10 billion in assets and thus are not exempt from the big cuts in debit interchange planned by the Federal Reserve Board. The Fed under Dodd-Frank's so-called Durbin Amendment is required to develop regulations implementing the sweeping law's payment card provisions. The Board last month proposed capping debit interchange at 7 to 12 cents per transaction, a cap that could cut 70% or more of nonexempt issuers' interchange revenues. The law gives the Fed until late April to develop final interchange rules.

Visa's commitment to a two-tier schedule comes even though its executives have indicated such a structure would be hard to implement operationally . In its statement, Visa said it “has committed to helping our clients navigate the current regulatory environment and determine how best to plan for an uncertain future and move their business forward. It's important to remember that the Federal Reserve hasn't finalized its recommendations and that there are numerous issues that must still be clarified and addressed. Nevertheless, we continue to actively engage our clients to provide Visa's perspective on the debit provisions and to address our clients' specific questions.”

Sen. Durbin weighed in Saturday with a statement. “Visa’s announcement confirms what I have long argued: that small banks and credit unions will not be hurt by this regulation and will in fact see benefits from it,” he said. “As the Federal Reserve moves toward final implementation of this amendment, it’s time to move past the misrepresentations and scare tactics and to recognize the strong pro-consumer and pro-competitive benefits of interchange reform.”

Still, despite their apparent new advantage over their big-bank rivals, credit unions and small banks in recent months have expressed many anxieties about the Durbin Amendment. Visa and MasterCard Inc. remain free to impose one rate schedule apiece that would spread the cuts to all debit issuers, not just the few with more than $10 billion in assets. And since the law gives merchants more transaction-routing freedom, smaller issuers fear merchants will steer debit card sales over networks with lower interchange, depriving them of revenue.

Howard Polack, a senior analyst at Boston-based Aite Group LLC and a former merchant-acquiring executive with KeyBank and FirstMerit Bank, says that “without a doubt” a single rate schedule is smaller issuers' top fear at the moment. A two-tier schedule would enable them to continue offering rewards on debit cards and avoid imposing fees on demand-deposit accounts or cards as some big banks are already planning, he notes. “This puts them in a position to grow a nice profitable business,” he tells Digital Transactions News.

Wild cards remain in the deck, however. MasterCard, a distant second to Visa in debit, hasn't made a decision about its debit interchange yet. In a statement, MasterCard seemed to take a swipe at Visa for endorsing a two-tier structure before the Fed releases its final rules. “MasterCard is continuing to evaluate the viability of a two-tier interchange structure for debit and excluded products,” the statement says. “We will be thoughtful and comprehensive in our analysis of this issue. We believe it is not prudent to make such a decision in advance of knowing all the facts. As we have done for over 40 years, MasterCard is committed to maintaining a competitive interchange structure that appropriately balances the payments ecosystem, and we plan to continue doing that going forward.”

Also, the Durbin Amendment's routing provisions could put downward pressure on small issuers' rate advantage. The law, which doesn't distinguish between signature and PIN-debit, bans debit cards from offering only affiliated networks. (An example would be Visa for signature debit and the Visa-owned Interlink network for point-of-sale PIN debit.) Furthermore, networks and issuers cannot interfere with merchants' transaction-routing choices. With more debit cards soon to offer merchants at least one unaffiliated network choice, networks with lower rates could get more traffic, which could mean less revenue for exempt issuers. “Even if the smaller banks have an advantage on signature debit, if merchants decided to route [transactions] on a different route, then they lose all that interchange they thought they were maintaining,” says Polack. And with less interchange, smaller issuers could see their cards “diminish in value” because they won't be able to pay for rewards or avoid imposing fees to compensate for the lost revenue, he adds. “The pressures will likely align the two tables, I would say, over the not-too-distant future,” Polack says.

Such fears are reflected in a Jan. 3 letter to the Fed from two executives at Eau Claire, Wis.-based Royal Credit Union, an institution with about $1 billion in assets. “Merchants … have no reason to support two levels of interchange they pay,” the letter says. And despite RCU being exempt from the proposed 12-cent cap, the executives urged the Fed to reconsider it so that all debit issuers can “retain a reasonable profit.”

“The consumer is the real loser in the implementation of this cap and … will end up replenishing the income for the financial institutions in other ways,” the letter says.

Besides small issuers' interchange, Dodd-Frank leaves the interchange of government debit programs and general-purpose reloadable prepaid cards unregulated. Visa expects to have a separate rate schedule for nonexempt issuers and products ready when the Fed implements its rules.