The Restoring American Financial Stability Act passed the Senate on July 15 and was signed into law by President Obama on July 21. Attached to this sweeping legislation is an interchange amendment largely unchanged from the Senate bill passed on May 13 that will probably necessitate credit unions accept lower interchange rates on their debit and credit cards, to the tune of $30 per card per year by one estimate.
This is truly a setback for credit union members, as the legislation empowers merchants to place multiple restrictions on acceptance of cards. At the same time, there is no promise on the part of merchants to pass their savings onto consumers. An unintended consequence may be that credit unions will need to assess fees on debit card transactions in order to cover their costs.
The latter option is definitely not good for either the member or the credit union, which places the interests of members above all else. The "post-Durbin world" ushers in an era of uncertainty for card issuers. Still, there are at least two aspects of interchange that remain within the control of credit unions to protect their institutions and continue to provide outstanding service to members.
The first can be termed "performance," which calls for credit unions to do some thorough portfolio analysis work to find pockets of opportunity for maximizing interchange revenue.
Credit unions can increase revenue and keep costs down by promoting card activation and increasing the number of transactions per card. They can focus on debit cards, in particular, which provide a growing stream of noninterest income. Strategies for maximizing noninterest income include effectively targeting members to drive usage behavior, such as increased signature debit transactions or increased usage at merchant categories that deliver higher rates of interchange. With card usage analytics tools, credit unions can dig into portfolio data that will enable this targeted marketing.
For instance, Genisys Credit Union, Auburn Hills, Mich., started using the CO-OP Revelation portfolio analysis tool last year to monitor its members' card usage trends. The credit union's goal was to identify low card usage members with one to five signature transactions per month. Genisys identified 11,145 members when the credit union ran its low card usage query. For its first targeted marketing campaign, Genisys sent a mailing to these members. Genisys' debit cards are tied to a rewards loyalty program, so the mailing touted the benefits of using the card as a signature transaction, as well as popular rewards for which the resulting points could be redeemed.
Post-mailing, Genisys saw an increase of 66.5% in signature debit usage. Among this group, the purchase amount increased by 44%. The credit union also noted that the average number of monthly transactions per card user grew by 134%, from 2.6 transactions per card per month to 6.1 transactions per card per month.
To top it all, its signature debit interchange revenue increased by 47%.
The second aspect of interchange within a credit union's control is "profitability," which speaks to the need to evaluate the number and relevance of their various point of sale networks, so that the credit union (not the merchant) retains control of how PIN transactions route.
In the past, many credit unions had to belong to multiple regional networks to ensure cardholders had full accessibility to their funds. Today, consolidation of networks has provided credit unions the opportunity to downsize their number of partnerships and retain the needed access. Many once-regional networks have become national in scope. Understanding which networks can deliver the geographic reach and value-added services credit union members need is one of the key components to capturing financial efficiencies.
Most credit unions can succeed by choosing one PIN POS network, a signature POS network, a national/regional network, an international network and a value-added network offering surcharge free and deposit sharing access, such as CO-OP Network. Some networks (again, such as CO-OP) play multiple roles, which is why this evaluation is so important.
A credit union should choose a PIN POS network partner that maximizes its net interchange revenue-"net" meaning interchange minus switch fees. A key consideration in the PIN POS arena is that the merchant, as the acquirer of the transaction, will choose to priority-route a transaction to the network that will yield them the lowest interchange expense. We recommend that card issuers minimize the number of POS networks with which they partner. The more networks you have on your card, the greater the opportunity for the merchant to dictate the network route of the transaction, which could have a negative impact on the amount of interchange a credit union can earn on that transaction.
More than four decades after POS interchange pricing was established, the system has never been more uncertain and perhaps more unfavorable to card issuers, especially credit unions. Yet, the way forward can still be clear by focusing on the basics of performance and profitability.
Eric Porter is executive vice president, business development and marketing at CO-OP Financial Services. He can be reached at 800-782-9042 ext. 2566 or eric.porter@co-opfs.org
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