By Norm Patrick
Recent events in the U.S., as well as policy changes abroad, have elevated the continued risk of reduced interchange revenue with respect to both credit and debit card programs.
Some events with the potential to shift the interchange revenue landscape include:
- A $6.2 billion settlement between Visa/Mastercard and a class of 12 million+ merchants was intended to resolve a 2005 antitrust case. Some merchants, however, may elect to opt out of the settlement and pursue their own lawsuits and negotiations directly. This particular settlement is based only on monetary damages, while another related case is pending that will address Visa/Mastercard business practices and rules.
- Changes in Congress, including new leadership of the House Financial Services Committee.
- Uncertainty surrounding the U.S. Consumer Financial Protection Bureau (CFPB) and the change in heads of the CFPB from Richard Cordray to Mick Mulvaney to Kathy Kraninger over a 12-month period.
- A December 2018 proposal by both Visa and Mastercard to cap interchange on all transactions conducted in 31 countries that arepart of the European Economic Area, which is an international agreement that allows for the extension of the European Union's (EU) single market to non-EU member parties.
These events and their effects on interchange revenue in the coming years could have a significant impact across the credit union and payments industries. PSCU, the nation’s premier payments credit union service organization (CUSO), estimates that a quarter of credit card revenue and more than half of debit revenue is comprised of interchange fees.
In the short-term, credit unions can take several actions to best position themselves to help offset a reduction in interchange. In particular, credit unions should continue to introduce and promote card programs that yield higher interchange, such as premium card products (credit) and business products (credit and debit).
In the case of debit, credit unions should carefully evaluate PIN network participation as each network has unique interchange revenue rates and fees.
What Else to Do
Credit unions should also continue to push for earning top-of-card-on-file positions across online and digital channels like Amazon, Netflix, PayPal and various app stores, as well as within mobile wallets. Once a user stores a card as the preferred payment method in these channels, it is highly unlikely he or she will take the time to change it, resulting in interchange income every time a purchase is made through that particular app or mobile wallet.
Long-term,a significant loss of interchange would be material and problematic from a profit and loss (P&L) perspective, but issuers would have the ability to adjust certain levers for credit card programs. For example, issuers may opt to maximize net interest margin, as regulations permit, through higher credit card rates and the lowering of deposit rates to manage funding cost.
A drastic reduction in interchange could lead issuers to decrease the value of rewards programs, which is currently a key driver among credit card programs. According to findings from a recent studyconducted by PSCU, more than 93% of survey respondents indicated they receive a reward or benefit when making purchases with their credit card.
Given that nearly 60% of debit revenue comes from interchange fees, this loss could be more significant and the ability to recoup through the card program itself would be difficult.Introducing an annual fee or other debit card fees may drive members to use lower-cost alternatives that would likely leverage ACH.There may be an option to increase pricing or fees for the underlying checking account, but this decision would need to be made relative to price sensitivity and competitiveness as credit unions seek low-cost funding via checking in the rising rate environment.
What to Do
Credit unions should continue to collaborate with trusted industry partners such as PSCU to seek out innovative payment alternatives that would enhance revenue, as well as explore new revenue streams. Implemented alternatives should strive to keep the credit union’s brand front-and-center and provide an exceptional member experience, as well as help position the credit union to combat negative impacts from the changing interchange landscape.
Norm Patrick is the VP of PSCU and leads Advisors Plus Consulting. Advisors Plus was established in 2004 as the consulting arm of PSCU. Together, PSCU and Advisors Plus’ products, financial services solutions and service model collectively support millions of credit, debit, prepaid, online bill payment and mobile accounts at PSCU’s Owner credit unions; protect over 2 billion transactions annually from fraud; and optimize credit union performance and growth. With nearly 25 years in the financial services industry, Norm founded the Debit & Checking practice area in 2007 based on his experience in managing one of the largest debit card portfolios in the U.S.For more information, visit AdvisorsPlus.com.