Future Is in the Cards
Financial institutions are now making more in credit card interchange than they are in overdraft fees, and experts said it's a sign that it may be time for credit unions to take a harder look at how much revenue weight their card programs should pull.
According to new data from the Lake Forest, Ill.-based economic research firm Moebs Services, 2016 was the first time credit card interchange, which hit $33.8 billion at year end, surpassed overdraft revenue, which totaled $33.3 billion.
“This is a major shift in how depositories have collected fees for decades,” Moebs Services Economist and CEO Michael Moebs said.
About 10 years ago, in 2006, overdraft revenue was 53.2% of all service charge revenue; credit card revenue was only about half of that, Moebs said. Today, credit card interchange is the largest source of service charge revenue.
The evolution in revenue is largely the result of huge growth in credit card use, which is now more than 30 times the volume of overdraft, plus the fact that the average credit card interchange fee is almost $1, according to Moebs.
Henry Meier, who is general counsel for the New York Credit Union Association, noted that bigger forces are also at play.
“We’re just simply seeing that as the economy gets stronger and we see household debt returning to record levels, it's almost logical that you are going to see people breaking out more of the credit stuff,” he said.
To be sure, overdraft revenue isn't dead — the median overdraft fee has hovered at $30 since 2013. But it has become more elastic, according to Moebs.
“Many depositories are beginning to realize a higher overdraft price doesn't translate into more revenue and have lowered their prices,” the economic research firm said. “As a result of a lower price, they are experiencing an increase in overall overdraft revenue.”
Credit unions may have an advantage here, according to the research findings. According to its survey study of 3,817 depositories, about two-thirds (66.2%) of banks charge $30 or more per overdraft item, but 50.7% of credit unions charge less than $30, Moebs said. Large credit unions have recently begun lowering their overdraft prices, the study noted.
Overdraft programs also tend to have higher margins than card programs, which bear the added cost of administering and paying out rewards, added Tony DeSanctis, who is a senior director at Cornerstone Advisors in Scottsdale, Ariz. But overall, there's probably not much headroom left.
“They’ll be hard-pressed to get — let's call it ‘more aggressive’ — on overdraft,” he said. “I think that's just got so many negative connotations to it and politically in every other way; especially for credit unions who are member-centric, it's tough.”
“I think for credit unions, there is a recognition that this is a declining source of revenue and that they need to manage it more appropriately or more conservatively,” DeSanctis continued. “But I also think it's still a big enough piece of the total pie that it's really difficult to completely pull away from it.”
Putting It on the Card
The implication, DeSanctis said, is that overdraft-reliant credit unions may need to start reallocating resources.
“With most of our clients, we’ve been having this conversation with them pretty aggressively that, both on the debit and credit side, they really need to be thinking about what we call noninterest fee income shifting dramatically from overdraft primarily on the debit side to interchange on the credit card side,” he said.
Credit cards can indeed be big money-makers for card issuers — even more so than debit cards, according to the Moebs research.
“Based on interchange fees and revenue, it is easy to see why a depository would prefer to promote credit cards. Debit cards create 76% more volume than credit cards. Yet, the credit card is more appealing due to its interchange fee being 250% greater. The higher credit card fee results in higher revenue, making up for the lower volume,” Moebs said.
RJ Tamburri, who is communications director at the New York Credit Union Association, noted that growing revenue from credit card programs could create special opportunities for credit unions.
“They can really get back to their bread and butter in areas like low-interest credit cards, credit-rebuilder credit cards, secured credit cards. Those are all areas that kind of speak to the credit union mission and philosophy, and really it comes down to marketing effectively to members and explaining the benefits of credit cards,” he said.
However, it's often difficult for many credit unions to compete with the largest players in terms of credit cards rewards, he added.
One reason may be that that big banks often use low-cost reward programs to stimulate credit card volume — a tactic that community banks and credit unions usually can't afford to duplicate, according to Moebs.
In turn, the declining weight of overdraft revenue may encourage credit unions to put more thought around ways to capitalize on their debit card programs instead.
That's especially the case for small credit unions and community banks, which tend to have a price advantage, Moebs said. Interchange fees for debit card transactions average $0.30 across the board, but they average $0.43 for institutions below $10 billion in assets and $0.25 for institutions above that threshold, it reported.
That leaves room for credit unions and other financial institutions to offer debit rewards programs that are more competitive than what large institutions might have, it added.
“The smaller institutions are going to need to step up with that and in some respects, are in a better position because they have the flexibility to offer rewards — although not as robust as on the credit side — but they have the flexibility without Durbin to offer some rewards value prop on the debit side,” DeSanctis explained.
That can be potent, given it's more likely that a far higher proportion of the average credit union's member base carries a credit union's debit cards than its credit cards, he noted.
Of course, as with most things, the mileage may vary depending on the credit union.
“If they look at this and decide that they need to have a more robust credit card program, then that's great,” Tamburri said. “Otherwise, it's really something that I think is up to the individual credit union CEO. It comes back to conversations that they should be having with their leadership and their board.”