Crying Foul Over Card Payment Rule Changes

Dan Fisher is worried. For a while now, the president/CEO of the Fargo, N.D.-based Copper River Group has been studying the relationship between card payment networks and credit unions, and he’s finding a few trends unsettling.

What’s worrying him, he said, is that some card network operators have been changing their rules – sometimes without much disclosure – and credit unions are seeing their interchange income shrink as a result.

The underlying mechanics are, of course, more complex and convoluted than that, but in a nutshell, they go something like this: Card payment networks and core application processors are increasingly altering their network operating rules to allow more PIN-less debit transactions. These are transactions that don’t require cardholders to enter a PIN, but that are treated as if one is used. The result is interchange income that’s lower than interchange income from signature-based transactions, as well as a shift of liability and risk back to card issuers – which is raising fraud costs for credit unions.

“I know credit unions have been screaming that their interchange has gone down, and it’s because of rules like this where, number one, is their fees that they earn off the transaction are dropping, but their fraud based on these transactions is increasing and they don’t have any chargeback rights to stop that fraud,” Fisher said in an interview with CU Times. In some cases, interchange income has dropped 30% or more because of the rule changes, he wrote in a recent blog post on his company’s website.

Fisher said the changes aren’t always obvious to credit unions.

“What they don’t realize is they don’t tell you that those rules that you signed, that you agree to abide by, they don’t tell you that you just signed over to them the ability to change the rules anytime they want to. They can change the amount of interchange you receive,” he said. “They can change the fees they charge you, they can change the rules around products that they can charge you. And you can’t say no.”

In the same recent blog post, Fisher laid out one scenario to help further explain the problem.

“Sometimes, ABC Vendor will require your institution to join the ABC Vendor Card Payment Network even though you were trying to avoid them by configuring your cards to process with Mastercard/Visa,” he wrote. “Furthermore, ABC Vendor does not have to disclose to you they just auto-enrolled you in their network. This means you are following the ABC Vendor Network Operating rules without knowing it, all the while thinking you were processing under Mastercard/Visa.”

In recent years, network operators have also been getting more brazen about rule changes, according to Fisher.

“They used to tell you that there was going to be a change, but they don’t give you the ability to opt out of that change,” he told CU Times. “And then most recently I was looking at some network operating rules where they changed the rules to say, ‘We now don’t have to tell you.’ So what happens is you have to constantly be watchful of any network change, any pricing change, and you’re responsible for being informed.”

That’s one reason, especially for small to mid-sized credit unions with fewer staff, that staying informed can be tricky. Another reason is that the contracts and operating rules can run into the hundreds of pages and can be hard to understand, Fisher said.

“I’ve seen contracts as many as 300 pages long, and I’ve seen network operating rules 500 pages long,” he said.

“They bury you in paper,” he added. “Somebody may attempt to start reading that stuff up front at the beginning. But then they realize they don’t know enough about the technical detail to really understand what these rules mean, so they can’t interpret what the impact on them is.”

Many credit unions “don’t understand that when you sign a five-year contract, you are literally giving that vendor for that card payment network an unlimited license to do whatever they want to do. And there’s nothing you can do about it until the contract expires,” he went on to say.

Credit unions that try to switch vendors could be in for a surprise, Fisher noted in another blog post in December.

“It gets worse,” he continued. “Some of the network operating rules include a network term that is different from your main processor contract term, with auto-renewal language that may trigger a year before your main contract expires. So, when you tell the vendor you’re leaving and going elsewhere, they drop this ‘Not So Fast’ nugget on your institution with a hefty early termination fee, and you go ballistic.”

Fisher told CU Times that nondisclosure agreements have prevented him from naming names publicly, but that didn’t stop him from writing an eight-page open letter to the NCUA and the Federal Reserve last April.

“Card payment networks manipulate the rules and exploit their clients by implementing rule changes that exempt issuers are forced to accept due to contract terms,” the letter said. “Furthermore, when issuers ask for a rules waiver (opt-out), they are declined. Community banks and credit unions are currently operating under a processing agreement that would be expensive to terminate, and realize that they are stuck. Core processors and the card payment networks are aware of this and take advantage of the exempt issuer.”

After this story was published, the NCUA emailed a response to CU Times concerning this issue. The email stated, “The NCUA does not have a role in overseeing or investigating the contracts between credit unions and their vendors.”

The NCUA did not comment on whether it received the letter or if it planned to respond to Fisher. FIS and Fiserv were both mentioned in the letter. Fiserv declined to comment and FIS did not respond to requests for comment.

Ann Davidson, vice president of risk consulting at Allied Solutions in Carmel, Ind., said she too is seeing rising fraud losses wipe out interchange income for more credit unions. Many credit unions signed their contracts years ago with card processors, but many don’t have a chance to review those contracts annually or to look at whether there have been any changes, she noted.

“I think the message is, any type of vendor you do business with, you need to understand that agreement from beginning to end. You need to know what’s in there. And if you don’t know what you don’t know, reach out to experts in the industry to help you explain what that means,” Davidson said.

“Every third-party vendor is going to charge you fees and they might up those fees. Asking questions before going into the relationship with that vendor can help you prepare for those fee changes and other stipulations,” she added.

But the larger problem is the card payment networks, according to Fisher.

“I believe that most credit unions are unaware that this is happening behind their back,” he said. “They’re just not aware of it, first of all. And I think most – and I generalize – I think there are some processors that are deliberately taking advantage of us because it’s a very complicated situation.”

“And so I’m screaming foul,” he said.