Financial institutions are now making more in credit cardinterchange than they are in overdraft fees, and experts said it'sa sign that it may be time for credit unions to take a harder lookat how much revenue weight their card programs should pull.

According to new data from the Lake Forest, Ill.-based economicresearch firm Moebs Services, 2016 was the first time credit cardinterchange, which hit $33.8 billion at year end, surpassedoverdraft revenue, which totaled $33.3 billion.

“This is a major shift in how depositories have collected feesfor decades,” Moebs Services Economist and CEO Michael Moebssaid.

About 10 years ago, in 2006, overdraft revenue was 53.2% of allservice charge revenue; credit card revenue was only about half ofthat, Moebs said. Today, credit card interchange is the largestsource of service charge revenue.

The evolution in revenue is largely the result of huge growth incredit card use, which is now more than 30 times the volume ofoverdraft, plus the fact that the average credit card interchangefee is almost $1, according to Moebs.

Henry Meier, who is general counsel for the New York CreditUnion Association, noted that bigger forces are also at play.

“We're just simply seeing that as the economy gets stronger andwe see household debt returning to record levels, it's almostlogical that you are going to see people breaking out more of thecredit stuff,” he said.

Overcoming Overdraft

To be sure, overdraft revenue isn't dead — the median overdraftfee has hovered at $30 since 2013. But it has become more elastic,according to Moebs.

“Many depositories are beginning to realize a higher overdraftprice doesn't translate into more revenue and have lowered theirprices,” the economic research firm said. “As a result of a lowerprice, they are experiencing an increase in overall overdraftrevenue.”

Credit unions may have an advantage here, according to theresearch findings. According to its survey study of 3,817depositories, about two-thirds (66.2%) of banks charge $30 or moreper overdraft item, but 50.7% of credit unions charge less than$30, Moebs said. Large credit unions have recently begun loweringtheir overdraft prices, the study noted.

Overdraft programs also tend to have higher margins than cardprograms, which bear the added cost of administering and paying outrewards, added Tony DeSanctis, who is a senior director atCornerstone Advisors in Scottsdale, Ariz. But overall, there'sprobably not much headroom left.

“They'll be hard-pressed to get — let's call it 'moreaggressive' — on overdraft,” he said. “I think that's just got somany negative connotations to it and politically in every otherway; especially for credit unions who are member-centric, it'stough.”

“I think for credit unions, there is a recognition that this isa declining source of revenue and that they need to manage it moreappropriately or more conservatively,” DeSanctis continued. “But Ialso think it's still a big enough piece of the total pie that it'sreally difficult to completely pull away from it.”

Putting It on the Card

The implication, DeSanctis said, is that overdraft-reliantcredit unions may need to start reallocating resources.

“With most of our clients, we've been having this conversationwith them pretty aggressively that, both on the debit and creditside, they really need to be thinking about what we callnoninterest fee income shifting dramatically from overdraftprimarily on the debit side to interchange on the credit cardside,” 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 adepository would prefer to promote credit cards. Debit cards create76% more volume than credit cards. Yet, the credit card is moreappealing due to its interchange fee being 250% greater. The highercredit card fee results in higher revenue, making up for the lowervolume,” Moebs said.

RJ Tamburri, who is communications director at the New YorkCredit Union Association, noted that growing revenue from creditcard programs could create special opportunities for creditunions.

“They can really get back to their bread and butter in areaslike low-interest credit cards, credit-rebuilder credit cards,secured credit cards. Those are all areas that kind of speak to thecredit union mission and philosophy, and really it comes down tomarketing effectively to members and explaining the benefits ofcredit cards,” he said.

However, it's often difficult for many credit unions to competewith the largest players in terms of credit cards rewards, headded.

One reason may be that that big banks often use low-cost rewardprograms to stimulate credit card volume — a tactic that communitybanks and credit unions usually can't afford to duplicate,according to Moebs.

In turn, the declining weight of overdraft revenue may encouragecredit unions to put more thought around ways to capitalize ontheir debit card programs instead.

That's especially the case for small credit unions and communitybanks, which tend to have a price advantage, Moebs said.Interchange fees for debit card transactions average $0.30 acrossthe board, but they average $0.43 for institutions below $10billion in assets and $0.25 for institutions above that threshold,it reported.

That leaves room for credit unions and other financialinstitutions to offer debit rewards programs that are morecompetitive than what large institutions might have, it added.

“The smaller institutions are going to need to step up with thatand in some respects, are in a better position because they havethe flexibility to offer rewards — although not as robust as on thecredit side — but they have the flexibility without Durbin to offersome rewards value prop on the debit side,” DeSanctisexplained.

That can be potent, given it's more likely that a far higherproportion of the average credit union's member base carries acredit union's debit cards than its credit cards, he noted.

Of course, as with most things, the mileage may vary dependingon the credit union.

“If they look at this and decide that they need to have a morerobust credit card program, then that's great,” Tamburri said.“Otherwise, it's really something that I think is up to theindividual credit union CEO. It comes back to conversations thatthey should be having with their leadership and their board.”