CUs Assess Impact of ‘Reg II’ Interchange Rule & Start Planning

Federal Reserve Board seal

Credit unions need to prepare as the Federal Reserve’s final rule in the Durbin Interchange Amendment (Regulation II) was announced this past October. It goes into effect July 1, 2023 and will require all debit cards to have two unaffiliated networks enabled for card-not-present (CNP) or online transactions.

This week, Cornerstone Advisors presented to credit union executives during an online discussion with a comprehensive analysis and update on the upcoming impact to credit unions stemming from the Regulation II. In Regulatory Due Diligence: The Impact of Reg II, President and Partner Steve Williams, Managing Director Brandi Gregory, and Senior Director Tony DeSanctis discussed how interchange revenue could potentially be displaced by 7 – 20 percent depending on a credit union’s specific circumstance.

Assessing how large the impact will be and how a credit union should adjust is the challenge standing before the industry, which includes actions to take versus what to brace for. During the discussion, Williams and his colleagues said:

  • They do not expect regulatory changes to impact overall debit volumes or an ongoing shift to CNP.
  • They expect these markets to continue to benefit from higher total consumer spending and further market share gains from payment methods such as cash and checks.
  • They anticipate the Fed’s changes to Regulation II will cause significant CNP routing share to shift from dual-message networks to single-message networks. Proposed changes to Regulation II will challenge previously beneficial industry dynamics by forcing card issuers to enable more routing options.

They also discussed how credit unions can work to diffuse the financial and operational brunt that’s coming toward the industry through the following planning and preparation:

  • By Dec. 31, 2022: Pull transaction volumes from 2019, 2021, and current year-to-date to understand how CNP volume was trending over that period. Perform “sad math” to determine the credit union’s potential impact.
  • By March 31, 2023: Finalize all network analysis, and have any necessary migrations scheduled and planned-for no later than Sept. 30, 2023 to minimize the impact prior to peak-season spending in that year.
  • By Sept. 1, 2023: Evaluate any immediate impact due to the regulation going into effect on July 1, 2023. Also, budget for a 1 – 3 percent additional impact in 2024. Plan for a trend in 2024 where CNP volume will mirror card-present (CP) volume splits.
  • By Dec. 31, 2025: Evaluate the impact of volume shift from 2023 to the current date. By late 2025, single-message network volume will most likely outpace dual-message network volume for ALL debit transactions.

The Durbin Interchange Amendment was part of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. In 2011, credit unions nationwide fought a difficult battle post-legislation regarding specifics within these debit-card interchange rules, which eventually were somewhat modified before they went into effect.

However, this latest rule (Regulation II) which goes into effect July 2023 is known as “Durbin 1.5” or “Durbin 2.0” to some in the financial services industry.

You can learn more in the presenters’ 23-slide presentation, including the impact on dual-message networks, CNP trends, debit market trends, network provider options, network responses and limitations, “three losses and one win,” interchange impact, fraud and branding implications, cost reductions, timeline for action, and more.

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