Debit card interchange income is one of the highest non-interest-oriented revenue streams for financial institutions. However, many institutions still don’t get the most out of their card programs. Insufficient benchmarking, sub-optimal interchange rates or too few transactions mean missed opportunities.
Maximizing interchange income can make a significant impact on your institution’s bottom line. The following steps will point you in the right direction. They will incentivize customer behavior, build customer relationships and increase revenue.
Measure What Matters
Clear measurements of customer behavior are needed to improve your institution’s interchange income performance. Effective benchmarking and the tracking of key performance indicators inform you of gaps to fill. A careful recording of the following can guide you to maximize interchange revenue:
- Penetration: the number of accounts eligible for cards compared to the number that have them. If there is a disparity between these two numbers, you should promote card use to a wider range of customers.
- Active Rate: the number of cards used in a given period. If customers do not use active cards, consider why. These trends can help you understand customer needs, use cases and outreach opportunities.
- Usage: the number of income-generating transactions on a given account. When examining usage figures, consider growth opportunities. Perhaps cardholders need more reason to use them or you have customers inclined to purchase other products.
The key to higher interchange earnings is expansion of your customer base and giving those customers opportunities to transact.
Make the Most Out of Your Networks
While you may be increasing debit card usage, you may not be receiving the highest dividends from said use. To do so, you must situate your institution in the best possible ecosystem. Choosing the wrong network partners might not show up on a bill, but it’s a cost represented in missed profits. Here are a couple of pointers:
- Satisfy requirements without exceeding them. The Durbin Amendment to the Dodd Frank Act requires issuers to provide a choice of interchange networks for routing debit card transactions (at least two unaffiliated networks). It also enables merchants to choose how to route them. However, many institutions support more networks than they are regulatorily required to. As merchants can determine the route of the transaction, this mistake gives them the option to pay less for interchange.
- Choose issuer-centric networks. Not all payments networks are created equal. The Federal Reserve Interchange study reveals the disparity of interchange fee profits for issuers. Although some of the data has changed, it illustrates that networks matter. If you are exempt under the Durbin Amendment (below $10 million in assets), you must make sure the payments networks you use are the right ones. The differences per transaction might seem minimal at first glance, but when they’re multiplied by tens of thousands or even hundreds of thousands of transactions, a few cents has exponential consequences to your bottom line.
A consultative analysis can further guide you with a comparison of not only costs, but income. It is also worth remembering that mergers and consolidation in the market have led to virtually identical rates across some networks, even if they haven’t completely merged into one.
Provide the Right Products
You can also strengthen interchange fee income by distributing products that drive up usage and have a higher rate of return. Whether physically or through digital issuance, delivering credentials to your customers incentivizes higher use. Some institutions still cling to ATM proprietary cards for the sake of security. However, with the wealth of data to support the safety of EMV and tokenization, it’s time to adjust.
Remember that when considering implementation of new products, the profits made will render upfront costs relatively low. Consider providing the following:
- Instant issue debit cards – For those who still visit branches, immediate access to debit cards means the immediate ability to transact.
- Business debit cards – These cards benefit businesses through their ability to make payments within a budget and without interest. They also pay higher rates to the institution and can apply to businesses of all sizes.
- Digital issuance – Broadening the ability to transact also applies to digital users. Through digital issuance, customers who open accounts online can receive their credentials without needing a physical card. With their card credentials in mobile or online banking, they can make card not present transactions, set up recurring payments and pay bills.
- Adding credentials to digital wallets – Empowering customers to transfer credentials into digital wallets can also increase interchange revenue. With push provisioning enabled, the likelihood of immediate transactions goes up.
Improving What You Can Control
The payments landscape is complex and constantly evolving. Many of the factors that determine payments trends are outside of your institution’s control. With interchange profits, the goal is ultimately to aim each element of your debit card program in the most favorable direction.
Get a glimpse into the future of payments by checking out our Digital Payment Trends in Banking white paper.
In his role, Matt Herren has employed advanced analytics and data analysis to not only react to fraud, but also to prevent it. As the Director of Payment Services, Matt has expanded CSI’s ability to address fraud through early identification of merchant breaches and fraudulent testing techniques. His work helps to increase bank profitability through fraud mitigation and card portfolio analysis, allowing customers to realize industry-leading results and maximize program performance.