Issuers need to get personal to reclaim interchange revenue
Debit interchange ranks alongside overdraft fees as one of the two leading sources of non-interest income for financial institutions, however many fail to actively manage their portfolios and optimize this profit generator.
Too few have truly analyzed the underlying dynamics of their interchange programs, and instead have simply enjoyed the increase of debit interchange revenue that has been the trend for decades.
The problem here is that beneath the surface, this success brought on by a constant rise in consumer volumes has masked some less than favorable rate changes and alterations to product mix. As a result, financial institutions are leaving potentially substantial amounts money on the table.
Debit interchange is already something of a cipher. Merchants pay an acceptance fee with each debit purchase, whether at the point of sale, various ecommerce sites or via digital wallets. PIN transactions are typically preferred by merchants because they carry lower, dynamic interchange rates, but PIN-less debit for smaller dollar transactions remains prevalent. Financial institutions face other significant challenges with signature interchange rates, not the least of which is the fact that these rates, set by card networks, are non-negotiable. In addition, in the Post-Durbin world, financial institutions cannot control their routing table, which impacts how the transactions are processed.
However, there are steps financial institutions can take using data they already have to optimize card usage and increase the number of transactions that are more valuable.
For instance, if a customer or member is not paying bills through the institution’s bill pay service, he or she is likely to be paying them on the biller’s website. Encouraging these individuals to use the bank or credit union’s debit card when paying bills on the biller’s website, instead of via the institution’s bill pay provider, can increase network transactions without asking for a major change in behavior from the customer. Beyond having the potential to decrease bill pay processing costs, the online debit transactions originated by the financial institution’s debit card users on the biller’s site are governed by higher signature-based interchange rates.
Another opportunity can be uncovered if a bank or credit union segments customers or members by age. Most individuals under 40 have relationships with “new economy” merchants such as Amazon, Netflix and Apple. If these customers are not showing card activity with these merchants, it’s safe to assume they are not using your institution’s card.
In fact, they may even be using a payment card offered by one of these new economy merchants. Amazon has been one of the most aggressive in this area offering Amazon-branded credit cards, store cards and Amazon Pay, which allows consumers to purchase products from non-Amazon sites using their Amazon credentials. In these cases, financial institutions should consider personalized campaigns and offers designed to convert customers to their debit or credit card.
Durbin’s enactment was significant in its shifting routing control to merchants and limiting rates for larger institutions. While it left banks and credit unions with less leverage, it did not leave them without the ability to smartly manage their card portfolios.
Financial institutions should be proactive in taking the steps necessary to focus on this area, rather than just riding the wave of increasing volumes. A number of resources and tools, well-known though too often unused, can assist banks and credit unions that are interested in making certain they are getting the most they can out of this lucrative area of their business.
Firms advising on strategies designed to optimize card portfolios can be of assistance provided they have demonstrated expertise in the area and possess the benchmarking data to go along with it. And, there are software platforms to automate aspects of monitoring variables related to card portfolios, but they must be more than simple contract management tools.
Making investments in these areas to optimize this important revenue line will pay for itself many times over. The constraints that Durbin has imposed make it more important than ever for financial institutions to take advantage of every opportunity available to increase the profitability of their debit card portfolio.