For years, interchange fees have been a dependable source of income for financial institutions, but that steady stream is shrinking as regulatory changes and shifting payment dynamics steadily chip away at this critical revenue source.

What Is Interchange Revenue and Why It Matters

To understand the current challenges regarding interchange revenue, it’s helpful to revisit what it is and why it has been so essential for financial institutions.

Interchange revenue is the income a bank earns from processing debit card transactions. When a customer makes a purchase, the merchant pays a small fee to the card-issuing bank. This interchange fee helps cover the cost of processing, fraud protection, and network access. For banks, it’s a source of non-interest funds, making it especially valuable in today’s evolving financial landscape.

The Decline of Interchange Revenue

Over the past decade, interchange revenue has steadily eroded. Federal Reserve data shows the average interchange fee for debit transactions dropped from $0.31 per transaction in 2011 to $0.27 in 2024. A four-cent decrease may not seem significant at first glance, but multiplied across hundreds of thousands, or even millions, of transactions, the loss adds up quickly.

This squeeze hits community banks especially hard. While national banks can offset the decline with diversified income from investment services and corporate lending, community banks operate with a much narrower set of revenue levers. Interchange remains one of the few scalable sources they can depend on to:

• Cover operating costs without raising customer fees
• Fund digital product innovation
• Reinvest in local services, community programs, and technology
• Provide consumer protections in the event of fraud, error, or other merchant disputes

Without meaningful action, continued erosion of interchange income threatens the ability of institutions to invest in the services their communities rely on. Protecting this revenue stream isn’t just a financial necessity. It’s a strategic imperative for long-term sustainability and local impact.

The Regulatory Factors Chipping Away at Interchange Revenue

One of the primary drivers behind long-term interchange decline is regulation. In the mid-2000s, retailers faced rising costs to process debit card transactions but had limited leverage to negotiate better rates, with only a handful of debit card networks available. To address this imbalance, the Durbin Amendment was passed as part of the 2010 Dodd-Frank Act to lower costs for merchants and consumers.

The law was framed as a win for both merchants and consumers. It imposed limits on the fees that large banks (those with over $10 billion in assets) could charge for debit card transactions, capping them at 21 cents per transaction, plus 0.05% of the transaction amount, and allowing for an additional 1-cent fraud prevention adjustment.

While the intent was to lower costs for merchants and, ideally, pass savings on to consumers, it also significantly reduced a reliable source of revenue for issuing banks.

The Impact on Community Financial Institutions

Once interchange caps went into effect for larger institutions, those lower rates quickly became the new norm. Merchants began to expect similar pricing across the board, regardless of whether the issuer was subject to the cap. That forced smaller banks to lower their fees to stay competitive, effectively pulling them into the same revenue squeeze.

The Durbin Amendment also introduced new routing rules that gave merchants more power over how transactions are processed. While that increased flexibility for retailers, it forced many community banks into less favorable networks that deliver lower revenue.

Unfortunately, the regulatory pressure shows no signs of easing. Lawmakers continue to float expansions to the Durbin Amendment that could extend caps and routing mandates even further. Groups like the Consumer Bankers Association and NAFCU have raised red flags, warning that broader regulation could hurt innovation and make it harder for community FIs to serve their communities effectively.

For institutions already operating on thin margins, these shifts signal the need to re-evaluate and strengthen debit card strategies.

Debit Card Optimization

While regulatory forces like the Durbin Amendment are outside of an institution’s control, one area remains firmly within reach: the debit card program.

A well-optimized debit card program does more than just process payments. It maximizes the value of every transaction, drives ongoing customer engagement, and reinforces loyalty with every tap or swipe.

Four Ways to Optimize Your Debit Strategy

Optimize network partnerships and routing strategy

Merchant routing preferences often favor lower-cost networks, and many processors who also own networks, may steer traffic in ways that benefit them or merchants over your institution.

Take time to review your network relationships to ensure processor transparency and implement issuer-friendly routing logic where possible. Even small adjustments can protect margins and boost interchange income.

Analyze and benchmark performance

To improve your debit strategy, you need to understand how it’s currently performing.

• What’s your activation rate?
• How frequently are cards being used?
• What is your average transaction size and revenue per card?

Tracking these metrics over time and measuring them against industry benchmarks can help you uncover performance gaps. Once identified, you can take targeted steps to boost usage frequency and, ultimately, increase interchange yield.

Promote card usage in digital channels

Consumers increasingly use digital wallets and mobile apps to make purchases, and your debit card needs to be there by default. Offering instant issuance and digital credentials helps accelerate activation and makes your card available immediately.

Support wallet provisioning for platforms like Apple Pay, Google Pay, and Samsung Pay, and encourage cardholders to set your card as the default for online checkouts and app payments. When your card is the easiest to use, it’s the one that gets used the most.

Educate cardholders on debit benefits

Consumers often overlook the everyday value that debit provides, so highlighting benefits like fraud protection, real-time alerts, and debt-free spending helps position your card as the smart choice for daily purchases.

If your institution offers rewards, focus on simple, meaningful perks that resonate with everyday spending habits, such as:

• Cash back on groceries or gas
• Emergency roadside assistance
• Local merchant discounts that support the community
• Pair cross-channel offerings with engagement, such as perks or incentives like high-yield savings rates tied to qualifying activity (e.g., number of POS transactions).

Even small incentives can drive consistent usage when they’re easy to understand and clearly communicated.

An effective way to introduce these benefits is early in the customer journey, right when they open their checking account. Leveraging onboarding emails and mobile prompts helps build awareness from day one. From there, reinforce the message with timely push notifications, in-app banners, and personalized messages, ensuring that your debit card stays top-of-wallet.

Time to Put Your Debit Strategy into Motion

Strengthening your debit card program starts with aligning it to both customers’ needs and your institutional goals. In doing so, you’re also building a stronger transactional relationship, one that keeps your institution top-of-mind between borrowing needs and often secures a first look when lending opportunities arise.

By reinforcing this relationship through convenience, education, and everyday value, your debit card becomes the natural choice for customers’ daily spending. That consistent engagement not only deepens loyalty but also creates a reliable source of non-interest income to support long-term growth.

The Decline of Card Interchange Demands Action

As card interchange revenue continues to decline, community FIs need to adapt. In an environment shaped by evolving payment regulations and shrinking margins, a clear, proactive debit strategy is no longer optional. Now is the time to position your institution for long-term success by turning your debit program into a powerful driver of value, engagement, and growth.

Looking for actionable steps to get started? Explore our card processing solutions to optimize your debit strategy, increase non-interest income, and deliver more value to your cardholders.

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