Because of various unfavorable legislative efforts, many sources of non-interest income are under attack. The Durbin interchange amendment, in particular, has generated deep concern in the industry. Yet, these concerns can be addressed with at least a half-dozen counter-offensive moves that are still available to you, centering on increasing profitability and reducing fraud expenses.
In fact, credit unions often simply do not take advantage of their credit/debit portfolios as revenue streams. Here are some steps you can take that will make a meaningful difference to your bottom line in a post-Durbin environment:
New Account Acquisition
Big banks are raising interest rates and annual fees as well as reducing reward program earnings and redemptions for all customers, not just those that exhibit bad behavior. The banks have disenfranchised many of their best customers and have spurred consumer interest in seeking the best card deals. These consumers are seeking more favorable terms in keeping with their on-time payment records, good credit ratings and low risk status. This should be a boon for credit union credit card programs, since they are already fairly priced and offer competitive reward programs. The time is optimum for growing credit card bases with low-risk cardholders.
Manage Existing Card Base
For both debit and credit card holders, credit unions can substantially increase revenue and keep costs down at the same time by promoting card activation and increasing the number of transactions per card. While credit card activation is a big issue, debit cards provide a real opportunity for credit unions to increase non-interest income by effectively targeting members to drive the usage behavior they want, such as increased signature debit transactions. With card usage analytics tools, credit unions can collect portfolio data that will enable this targeted marketing. One compelling case study is Signal Financial FCU, which experienced an 80% increase in transaction volume, a 73% increase in spending and a 68% increase in interchange income after implementing analytics tools.
Fraud continues to take a bite out of card program profits. Credit unions should review processing configurations to take advantage of all the fraud fighting tools available. Other operational processes should also be reviewed to plug any potential opportunities to circumvent security procedures. Credit unions should review procedures related to card blocks, card issuance, PIN change, change of address and card reorders to make sure the appropriate member authentication occurs for these requests. These tools allow credit unions to crack down on chargeback fraud and family/friendly fraud, particularly small ticket disputes that credit unions take directly to general ledger accounts.
Select The Right Network Partnerships
The interchange earned on PIN debit transactions can vary by network. Credit unions should rationalize participation in PIN debit networks to maximize interchange and eliminate network redundancies. ATM Networks vary greatly in terms of geographic coverage, surcharge-free access and deposit-taking capabilities, so credit unions should also rationalize participation in these networks to eliminate redundancies and associated costs.
Manage Share Draft Pricing Strategies
Because revenues from share draft accounts represent about 60% of non-interest income for credit unions, preservation of these account relationships is paramount in retaining these income streams. In fact, free checking is becoming a distinct competitive advantage, one credit unions should sustain in spite of smaller margins.
Various pricing strategies can be used to modify member behavior to increase transaction volume and drive members to the revenue-generating access vehicles. When a member writes a check, this generates an expense. When a member uses a debit card, this creates revenue. Be sure the share account pricing strategies provide the right incentives to promote card usage over check writing. Finding ways to encourage use of electronic channels will also reduce overall share draft costs. It's more cost effective to offer members account access and transaction capabilities through electronic channels like home banking and voice response units (VRU).
Solidify The Share Draft Relationship
Cross-selling other share draft features can promote more card usage. Bill pay is a sticky feature that makes members reluctant to change relationships. Adding mobile access and promoting rewards for multiple credit union products also solidifies the relationship to keep card usage on the credit union card products. Selecting a loyalty program that allows the credit union to offer reward points for multiple services or relationships also creates "sticky" members.
With the recent legislative activity concerning interchange, it's easy to become confused by questions of "What's next?" We urge you to stay the course.
Adopting the measures described here, credit unions can make sure their credit and debit programs are operating efficiently and card revenues are optimized-now and in the future.
Eric Porter is executive vice president, business development and marketing, with CO-OP Financial Services, Rancho Cucamonga, Calif.