SCOTTSDALE, Ariz.—A new report from management consulting firm Cornerstone Advisors has found that a lack of transparency is resulting in overpayment by financial institutions on their debit processing contracts.
According to the report, “Drawing Back the Curtain on Vendor Pricing for Debit Processing,” many FIs are paying upwards of five times what institutions of similar size and transaction volumes are paying. Among the report's sources is the Cornerstone Contract Vault, a database of 15,000 pricing points the company said it has collected from negotiating thousands of vendor contracts.
The report discusses how many vendors rely on payments processing for the majority of their revenue growth. In fact, the three largest providers receive up to one-half of their revenue from payments.
"Payments is a very lucrative and commoditized business, and as long as vendors are not publishing their rate cards, banks can pay more than they should for services," said Bob Roth, managing director at Cornerstone Advisors, in a statement.
Debit processing can account for a greater share of an FI’s total vendor bill than core processing, the report states. For example, the median $1-billion financial institution spends $1.17 million per year on debit processing compared to $770,000 on core processing.
"This means that over the course of a five-year contract, a difference of just five cents per transaction amounts to more than $1.5 million in either lost income or resources lost for new initiatives," Roth said in the statement.
Other findings from the Cornerstone report:
- Debit card usage has increased at a compounded annual growth rate of more than 15% over the past 14 years.
- Total revenue from facilitating those payments in North America is expected to jump from $117 billion in 2012 to $177 billion in 2022.
- The average bank's annual interchange income-per-ATM/debit card climbed 92% between 2005 and 2014, from $36 to $69.
- The difference between paying at the 25th percentile and 75th percentile level is equivalent to about 17% of a bank's annual profit.
Cornerstone said seven mid-size banks that negotiated vendor contracts with Cornerstone's assistance in 2014 saved at least $1 million. Two cut costs by more than $5 million.