SCOTTSDALE, Ariz.—Credit unions not watching their debit processing costs could be tossing away as much as 17% of their earnings—money that could go toward investments in new technology or even returned to members.
That is a key finding from Cornerstone Advisors’ recent report, Drawing Back The Curtain On Vendor Pricing For Debit Processing. The study finds that sizeable loss stemming from letting the debit processing contract run on autopilot without any scrutiny, and not speaking to processors about possible savings.
Bob Roth, Cornerstone’s managing director of payments, explained those things can happen due to how debit pricing has become more complex over time. He said some processors typically provide FIs with only the bottom-line debit statement each month—meaning the costs for the month’s processing that have been deducted from the transaction revenue are not shown, only the revenue that is coming to the CU.
In addition, since debit is driving significant dollars, even if processing costs are clearly detailed in the monthly statement the CU may not be paying close attention.
Contracts On Autopilot
“These financial institutions are paying for letting their contract go on autopilot,” said Roth. “That is misdirected spending because they don’t have the money that their peers have, those who pay attention to their debit spending, to invest in new technology, which is where we often see these debit savings going.”
Those not attending to their debit contract are often overspending by more than they might overspend in other tech areas.
“What we see in the range for overspending with core processing and ancillary services can range from 5% to 20%,” explained Roth. “For debit processing the range we see is 20% to 50%.”
With debit’s continuing growth—it’s around 16% annually and Cornerstone is projecting it will grow another 50% in the next decade—the money wasted will increase if spending is not checked, said Sam Kilmer, senior director with Cornerstone. And Cornerstone’s study shows that those overspending are paying a lot more than FIs closely watching their debit expenses.
“When we did the math on this, and if you are at the 75th percentile and overspending the most—which is 25% of the institutions out there—17% of their earnings is going away,” said Kilmer. “That is a big deal. A big chunk of change.”
What has brought about some of the overspending, according to Cornerstone, is that as annual debit transactions have rapidly increased, the margins some processors charge have not come down as debit processing has become more of a commodity—unless the FI has revisited the contract and secured a reduction from the processor.
“Again, this is the effect of money coming in the door from debit, and not going out,” said Roth.
Management Not Aware
Roth noted that in credit unions that are overspending the management team is often not aware of how big of an expense debit is. “At a $1-billion shop, for example, we find the institution often spending $1.17 million annually on debit processing compared with $770,000 on core processing. So it’s higher than core.”
What are the best practices at CUs efficient with debit spending?
“Where we see the best performance is when the COO, CFO, all the way up to the CEO take an interest in what is being spent on debit,” said Roth. “When that level of attention is paid everyone else involved with debit processing keeps their eyes on the numbers and we see banks and credit unions drop down into that 25th percentile. When we don’t see that level of interest, the FI gets nowhere near that level of efficiency.”
Roth added that payments need to be part of ALCO discussion, and that payments need to be included in the technology plan.
“At the end of the day the technology plan ought to cover payments,” said Roth, emphasizing how payments are becoming a much bigger part of the organization. “And, they are technology.”
Also, with payments part of the tech plan, the dollars saved get reinvested into technology, something critical to the growth of the CU, said Roth. “Otherwise, the money just gets booked and you can’t reinvest it.”