Legislative & Regulatory Update

​Debit fee cap fraught with unintended consequences; majority of small businesses oppose Big Box Bailout bill; and DEA moves to reclassify marijuana as less dangerous drug. 

by John Alexander, Director of Legislative & Regulatory Affairs
 
Debit Fee Cap: Risk to Credit Unions and Community Finance
In a regulatory move that echoes with the dissonance of unintended consequences, the Federal Reserve has proposed significant amendments to Regulation II, potentially redefining the economic landscape for credit unions and their members. This proposal, poised to slash debit interchange fees, emerges not just as a policy shift but as a financial tempest threatening to unsettle the foundational economics of credit unions across the nation.
 
The heart of this controversy lies in the Federal Reserve's decision to recalibrate the components of Regulation II’s interchange fee cap. At first glance, this might seem a mere tweaking of financial regulations, but for credit unions, it's a seismic shift that could erode their financial stability. The rationale behind the Federal Reserve's move, grounded in what many deem flawed methodologies, ignores the broader impact on small-scale financial institutions. By lowering the cap on debit interchange fees—fees paid by merchants to banks or credit unions when consumers use debit cards—this proposal could substantially reduce the revenue streams that keep these not-for-profit institutions afloat.
 
Credit unions, champions of community financing, reinvest their earnings back into the communities they serve, supporting everything from small business loans to educational programs. The proposed cuts to interchange fees threaten this virtuous cycle, risking not just the financial health of the credit unions themselves but also the economic well-being of the communities that depend on them. Moreover, the impact extends beyond institutional finances to affect the very members these unions serve. Reduced interchange revenue could lead to higher fees for members, fewer free services, and diminished financial inclusivity, particularly for low-income members who rely on these community-centric institutions for affordable financial services.
 
The Federal Reserve's own data, coupled with independent research, underscores the disproportionate impact of such regulatory changes on smaller credit unions. Despite an exemption for institutions with assets under $10 billion, the ripple effects of reduced fees for larger issuers create a competitive imbalance, putting additional pressure on these smaller entities. This dynamic could force credit unions to consolidate further, reducing competition and choice for consumers.
 
This scenario paints a grim picture not just of a regulatory misstep but of a policy that could deepen financial divides. The unintended consequences of the Federal Reserve's proposed rule loom large, threatening the fabric of community banking and the financial stability of millions of Americans. As credit unions mobilize to respond, the broader implications of this policy will unfold, shaping the future of financial regulation and its real-world impact on people's lives. It's a pivotal moment that calls for a reconsideration of the balance between regulatory intent and economic impact, ensuring that efforts to streamline costs for merchants do not inadvertently undermine the nation’s financial inclusion goals.
 
Majority of Small Businesses Oppose the Big Box Bailout Bill
In a fiery rebuke penned directly to the members of Congress, America's Credit Unions delivered a searing critique of the so-called Big Box Bailout bill, casting it as a looming disaster that would fundamentally dismantle the very fabric of a credit system that benefits families and small businesses across the nation. This legislative proposal, according to newly released research, threatens to pivot the advantage squarely towards the coffers of massive retailers, leaving the average American and small entrepreneurs to bear the brunt of its consequences.
 
Greg Mesack and Jason Stverak of America’s Credit Unions delineated six dire repercussions that would ripple through the economy should the interchange bill pass. First among these is the chilling prospect of constrained access to unsecured credit from trusted entities like credit unions. This shift would push financially vulnerable Americans towards riskier alternatives, such as payday lenders, known for their predatory practices. Furthermore, the research predicts an escalation in annual fees on credit cards, erecting formidable barriers to credit for those at various economic levels, particularly impacting those who lean on credit the most to meet their daily needs.
 
The document also highlights a potential reduction in fraud protection measures. The current integrated systems that help detect and prevent fraud could become fragmented, increasing costs for card issuers, and exposing consumers to heightened risks. In addition, the processing costs associated with card transactions could soar, squeezing the already tight margins of community financial institutions and compelling them to reassess or scale back their card programs.
 
Surprisingly, while the bill could slash operating costs for many large retailers, it carries no mandate requiring these savings to be passed on to consumers. This one-sided arrangement hints at a significant windfall for big box retailers at the expense of the consumer. Lastly, the overarching impact on the economy could be severe, with tighter credit card policies and reduced credit limits prompting consumers to tighten their belts and spend less.
 
The urgency of this message was underscored by the involvement of Glenn Grossman of Cornerstone Advisors, who spearheaded the research. America's Credit Unions has taken this message to the masses, producing both short and long-form videos to articulate the negative impacts vividly and drive home the potential fallout of the Big Box Bailout bill.
 
Adding to the chorus of dissent, the Small Business Payments Alliance (SBPA), under the auspices of the Electronic Payments Coalition and including America’s Credit Unions, released its own findings during National Small Business Week. A substantial majority of small business owners expressed opposition to the proposed changes. A notable 83% of small business decision makers advocate for maintaining or decreasing government regulation. The sentiment is clear: the Credit Card Competition Act, or the Big Box Bailout bill, is seen as a boon for large retailers rather than the small businesses it purports to aid, with 60% asserting that the push for the bill neglects the adverse impact on small enterprises.
 
The research paints a grim picture of the future landscape for small businesses, with many predicting that the forced adoption of new or updated processing networks would unfairly impose significant costs on them, eroding profit margins. Furthermore, nearly all small business leaders recognize the critical importance their customers place on secure payments, underscoring the necessity of current payment processing fees for ensuring digital privacy.
 
The rallying cry from Credit Unions and allied organizations is a testament to the widespread concern and opposition among stakeholders about the far-reaching impacts of the Big Box Bailout bill. As these entities mobilize their resources and arguments, the stage is set for a contentious debate in Congress, with the financial well-being of countless American families and the health of small businesses hanging in the balance.
 
Historic Policy Shift: DEA Moves to Reclassify Marijuana as Less Dangerous Drug
In a monumental shift that could reshape the landscape of American drug policy, the U.S. Drug Enforcement Administration (DEA) is set to reclassify marijuana, recognizing its medical uses and lower abuse potential. This significant policy change, announced just ahead of the public-comment period, will potentially move marijuana from Schedule I to Schedule III classification, aligning it with substances like ketamine and some anabolic steroids. This move reflects a historic change, marking the DEA's most substantial policy update in over half a century.
 
The reclassification proposal comes after a comprehensive review initiated by President Joe Biden in October 2022. President Biden, responding to longstanding calls for cannabis reform, also took steps to pardon thousands of Americans convicted federally of simple marijuana possession and urged state leaders to follow suit. “Criminal records for marijuana use and possession have imposed needless barriers to employment, housing, and educational opportunities," Biden stated, emphasizing the need to correct these past injustices.
 
The reclassification of marijuana could significantly impact several areas. Firstly, it may reduce the tax burden on marijuana businesses, which currently can be as high as 70% due to federal tax codes applicable to Schedule I or II substances. Industry groups predict that moving marijuana to Schedule III will allow these businesses to operate more like those in other sectors, improving their competitiveness against illicit markets.
 
Furthermore, research into marijuana could become more feasible. Currently, the Schedule I classification creates substantial barriers to clinical studies, given the tight restrictions around drugs deemed to have no accepted medical use. Rescheduling would facilitate more research, allowing scientists to better understand and harness marijuana's medicinal properties.
 
However, the move is not without controversy. Critics from different perspectives argue over the necessity and potential consequences of rescheduling. Some believe marijuana should be removed from the Controlled Substances Act altogether and regulated like alcohol, while others caution that any easing of restrictions could lead to unintended negative effects.
 
Despite these debates, the immediate effect on the nation's criminal justice system might be limited. Federal prosecutions for simple marijuana possession have been rare in recent years, and Biden's pardons have already alleviated some of the legal burdens associated with past convictions.
 
This policy shift by the DEA reflects a broader trend of aligning federal drug policies with state laws, where the legalization of medical and recreational marijuana has been advancing rapidly. As the public-comment period approaches, stakeholders from all sides of the issue will have the opportunity to express their views, shaping the final rule and the future of marijuana regulation in the United States.
 
As always, feel free to contact John Alexander with any legislative or regulatory concerns.