By Ray Birch
WASHINGTON—A federal court ruling in Corner Post v. Board of Governors of the Federal Reserve System may give smaller credit unions a short-term competitive advantage, but payments experts warn that the longer-term picture could bring additional revenue pressures across the industry.
They say credit unions can take steps now to mitigate the impact, but the ruling could reshape the economics of debit card transactions for years to come.
Earlier this month, the U.S. District Court for the District of North Dakota sided with retailers in their challenge to the Federal Reserve’s 2011 rule governing debit interchange rates under the Durbin Amendment. The court said the Fed must base its caps solely on the actual per-transaction cost of processing—without including additional allowances for fraud losses and related expenses. If upheld on appeal, the decision would require the Fed to recalculate the debit interchange caps, a change likely to cut revenues for large, regulated institutions over $10 billion in assets.
Short-Term Advantage For Smaller CUs
Tim Kolk, principal of TRK Advisors, said the immediate effect could create an opening for credit unions under the $10-billion threshold.
“As with any regulation which impacts only part of a population, there are some credit unions who will comparatively benefit—those who are under the $10-billion limit and expect to stay there,” Kolk said. “They can use that advantage to differentiate their product and relationship value.”
Kolk, who has advised institutions crossing the $10-billion asset mark, noted that the transition often “more-or-less permanently reduced their overall financial performance.” While the ruling could help smaller players in the short term, he cautioned that the entire credit union system ultimately depends on a financially healthy credit union community in total.
Shrinking Rates Likely To Spread
Payments expert Brian Scott, said that even FIs not impacted by the ruling should brace for tighter margins.
“Most credit unions are not directly impacted, but they will be,” Scott explained. “As with Durbin, interchange rates across the board went down. This will cause rates again to shrink a little bit—another two to four cents per transaction—which is significant when you’re already down to 15 or 20 cents.”
Scott believes the ruling further “crimps the profits” of financial institutions, and sees little chance of reversal even if the case reaches the Supreme Court.
Steps Credit Unions Can Take Now
Both experts emphasized the importance of acting quickly to shore up non-interest income:
- Boost debit transaction volume. Even small-dollar purchases help build interchange revenue.
- Promote credit card use. Credit card interchange is typically two to three times higher than debit, making it a more lucrative channel. Encouraging members to use credit cards as “charge cards” they pay off monthly can be especially effective.
- Manage credit lines strategically. Ensuring members have the capacity to use credit responsibly can maximize transaction volume without increasing risk.
Capital One’s Strategic Position
Scott added that some market players are already poised to benefit from the ruling—most notably Capital One.
“Maybe the biggest beneficiary out of this is Capital One because of their acquisition of Discover,” he said. “Once again, Capital One looks like the smartest people in the room.”