Following the passage of the Durbin Amendment in 2010, changes to the debit card business landscape under Federal Reserve Regulation II (which outlined the provisions to enforce the Durbin Amendment) have presented challenges, not only to credit unions, but to all of the key stakeholders in the card business.

Regulation II was introduced by the Federal Reserve Board in October 2011 with the intention to add competition and fairness to debit interchange fees and transaction routing. Institutions with total assets of $10 billion and above had their debit card interchange revenue capped and had to accept a blended interchange yield drop of over 52%. The FRB also included provisions that protected small issuers – those with assets of less than $10 billion – by excluding them from the interchange rate provisions; however, nothing in the final rules explicitly requires the networks to maintain favorable interchange rates for institutions under the $10 billion asset threshold.

Payment networks had to become more creative in balancing merchant and issuer expectations and profitability. As we are observing today, these dynamics are producing an impact that the FRB was trying to avoid: Negative financial influence for the small issuers who are exempt.

Caps to interchange rates have proven profoundly unpopular since their inception. This is true for financial institutions, of course, but it is also remarkable to realize how little consumers have benefited from the intent of the Durbin legislation. Given credit unions' mission to serve community and member needs with transparency and without raising fees, it has proven particularly difficult for credit unions to be locked into a position where they have had to choose between cutting member services and cutting margins.

Overdraft Fee Regulation

Lower overdraft fees have been a source of member-centric differentiation in recent years. Credit unions have led the financial services industry in providing their members with a variety of choices regarding their overdraft solutions, including Courtesy Pay (opt-in service), overdraft lines of credit, transfers from savings and transfers from credit cards. Members can typically select one or all of these services while also having the option to "opt out" from all of them.

Nearly concurrent with the regulations that have impacted debit interchange revenue, some significant regulatory movement has also taken place in terms of overdraft fee income. Regulation E was modified in 2010, requiring that all financial institutions secure an accountholder opt-in in order to charge an overdraft fee for one-time debit card and ATM Courtesy Pay transactions. Since then, the CFPB has been evaluating overdraft practices more holistically – encompassing not only debit card and ATM transactions, but also checks, ACH and other transactions that debit funds from a deposit account. This month, CFPB Director Richard Cordray noted that the bureau is currently in "pre-rule stage" of an overdraft rulemaking, with no timing stated for when a rule might be proposed.

Optimal Debit Portfolio Performance

Credit unions should consider several measures to mitigate the downward pressure on debit interchange rates and income:

• Stay up to date on these issues and portfolio performance. Consider appointing a senior "point person" within your credit union to keep your executive team and board of directors updated as legal proceedings and events progress. In addition, review reporting that focuses on interchange income and key performance metrics of your portfolio for the executive team to periodically review.

• Take another look at Penetration, Activation and Usage (PAU) metrics. Debit card usage has been on the rise in past years, which has masked some erosion of revenue and created, to some degree, a false sense of performance. In reality, there are large differences in the key performance drivers of PAU, which have significant impacts on revenue. Benchmarking your portfolio and evaluating your operating practices is more critical than ever and can yield strong results for your credit union.

• Focus on member growth and checking penetration. Growing membership through checking accounts is the lifeblood of a credit union. Given that checking accounts can represent among the lowest credit union funding sources, coupled with relationship and income potential, ensuring you have attractive products and a constant focus on checking acquisition – with debit cards – is key.

Member-Centric Overdraft Solutions

Here are four steps credit unions can take to serve members even more effectively through flexible, member-friendly overdraft programs:

• Position your overdraft program as a value-added solution. In all external communications – as well as in-house strategic thinking – communicate the mindset that your overdraft program is another valuable component of your credit union's overall checking continuum.

• Clearly disclose the features of your overdraft program. The CFPB recommends that financial institutions "provide accountholders with clear, comprehensive terms and pricing information for all available overdraft options." One of the simplest ways to guarantee clarity for your members is to consider utilizing the Pew disclosure box format.

• Contact members if they are overdrawn. Personally contact members who are overdrawn, especially if it has been longer than a few days. Members may be chagrinned at first, but they will likely be grateful that you have taken the time to call a one-time error to their attention. However, it is equally important to reach out to frequent "heavy overdrafters" to understand what is causing their situation. This group is also likely to be pleased by the individual attention, and the discussion may create an opportunity to educate these members on other options to help them better manage their checking accounts.

• Be proactive. On one hand, not much has occurred since the CFPB began studying overdrafts. On the other hand, we have seen interesting developments, such as the elimination of overdraft transfer fees, lower fees on Courtesy Pay debit transactions, expansion of "next day grace" programs and low-cost payday alternatives. Most credit unions have taken a "wait and see" approach while members have increasing needs for short-term liquidity, which unfortunately may be sought after through other types of lenders at a very steep cost.

Contending with losses in noninterest income is a challenge for most credit unions. With continued uncertainty over interchange and overdraft regulations, many credit unions have deferred taking any action until there is more clarity. While that approach is understandable, we face a reality that a portion of 50% of noninterest income is at risk – and that should motivate many into action. With focus, there is much that can be done to capitalize on member growth, more effectively serve member needs and ultimately drive noninterest income to the credit union.

Norm Patrick is the Vice President at PSCU, Advisors Plus Consulting. He can be contacted at 727-299-2523 or npatrick@pscu.com.