Like its peers, Brockton-based HaborOne Credit Union occasionally has to write to customers to explain that their debit card information may have been compromised. But a recent letter included something more unusual – a plea that those customers urge their congressmen to take merchants to task for the problem in question.
It was an attempt to get customers to speak out on debit card security issues, according to HarborOne spokesman Jim Rice, referring to the federal government’s efforts to regulate debit transactions. The controversial appeal, since removed from the letters after regulations passed last month, illustrates the long-running war between merchants and banks – a war in which merchants claimed a significant victory last month.
At the time, the Federal Reserve proposed limiting what banks could charge merchants for debit-card transactions, capping the so-called interchange fees at seven to 12 cents per transaction. The current rate is an average of 44 cents.
Meaningful Money
The cap is more than reasonable to retailers’ point of view, but has left the financial industry fretting about what it calls a significant loss of necessary income.
“We’re trying not to overreact, although certainly [debit fees] are a meaningful amount of money to any organization, and it certainly is to ours,” said Dorothy Savarese, CEO of Harwich-based Cape Cod Five Cents Savings Bank. With 30,000 debit cards issued by the nearly $2 billion-asset bank to date, it amounts to millions of transactions.
Opposition to the fee cap is no longer about preserving profit margins, Savarese said. This cap would prevent banks and credit unions from covering basic costs – including the security costs of debit card information, she added.
That issue is at the heart of HarborOne’s letter. In the latest incident, as usual, the credit union received notice from Visa that some of its customers’ debit cards may have been compromised – without identifying which merchant was the source of the breach. In these cases, the credit union must go to the trouble, and expense, of making customers whole.
HarborOne explained the situation to affected customers in its December letter, then went further in urging them to contact congressmen.
“Tell them that you believe that the retailer or vendor responsible for the security breach should be held financially accountable for the costs of reparation,” the letter reads. “Urge all of them to sponsor and support legislation resolving the credit and debit card security breach crisis by having vendors and retailers and other businesses establish sound information security systems.”
Rice said the legislation passed without resolving the security issue. For now, the expenses will remain in the hands of financial institutions, and merchants will pay less.
Little Sympathy
Rice and his peers get little sympathy from Jon Hurst, president of the Retailers Association of Massachusetts. Processing debit transactions costs pennies – far cheaper than processing paper checks – and yet merchants have to pay considerably more every time a customer swipes a debit card, he said. Those costs are inevitably handed down to consumers. Smaller fees, he said, will amount to lower prices.
What’s more, Hurst disagrees with HarborOne’s blaming retailers for security breaches. Retailers protect customer information by following guidelines set up by the financial industry itself. If the retailer is at fault, Visa or MasterCard must make up the cost – not the bank.
Hurst also noted that the newly instituted cap only affects institutions of $10 billion in assets or more, which certainly doesn’t include HarborOne, or, indeed, most Massachusetts institutions.
That hasn’t stopped smaller institutions from strenuously protesting. The Credit Union National Association has requested Congress hold hearings on the matter, even though only three credit unions nationwide fit the $10 billion-plus description.
“Other banks, while they won’t have to abide by the regulation, will still be at the mercy of the marketplace,” said Jon Skarin, director of federal regulatory and legislative policy with the Massachusetts Bankers Association.
Skarin and Rob Kimmett, spokesman for the Massachusetts Credit Union League, both say that merchants will steer customers to the cheapest options – in this case, toward debit cards from the larger, capped institutions, by offering discounts or other incentives.
The proposal does include a stipulation that merchants are not allowed to steer customers toward any favorable financial institution’s cards, but Kimmett said the regulation did not contain any specific mechanism or force to actually prevent it.
Hurst scoffed at that idea, calling it impractical for merchants.
It just isn’t feasible for retailers to discriminate against customers’ cards at the point of sale, he said. “When has that ever happened?”
Trickle Down Economics
Smaller-institution bankers, however, believe that although the impact might take longer to reach them, it will reach them nonetheless. In that case, they’ll have to pass along more fee charges to customers in other ways.
Savarese said her bank is holding off on any major fee decisions until regulators and the industry have a better idea of what the final rules will be.
Robert Cashman, CEO of Chelsea-based Metro Credit Union, agreed that it was too early to say what fees would have to give – but he pointed out that some larger banks, such as Bank of American and Citizens, had already announced changes to checking account fees in part because other revenue streams had gotten pinched.
Debit cards, hugely popular with consumers, are a must for banks and credit unions, he said. But it’s hard to think the proposed cap can go through without creating pressure elsewhere.
“At this point, we’ve positioned ourselves to make sure any of our rates and fee structures are extremely competitive,” he said. “But obviously, with this on the horizon, we are concerned that a change would have to be made."
