All but a handful of credit unions are exempt from the regulated interchange rates enacted under the Durbin Amendment. This exemption, however, does not mean immunity from the direct and indirect effects of the increased pressures on interchange rates in the fight to retain and gain transaction volume.
It is important that all CUs learn and understand the nature and impact of the effects of regulatory changes and explore strategic ways to overcome compressed interchange rates.
The first direct consequence of the Durbin Amendment is the unaffiliated network requirement: credit unions must issue cards that carry two unaffiliated networks, such as Visa and NYCE, as an option for merchants. Secondly, merchant routing privileges enable merchants to choose to route transactions via the least expensive route, further diluting interchange income for the issuer.
Stemming from these top-level effects are a host of indirect, but no less important, consequences. The industry is witnessing a tremendous increase in competition among brands and networks. To remain competitive against PIN/POS processing, brand associations are lowering the interchange rates to attract common PIN/POS transactions.
Another way brands are attempting to retain transactions is by routing PIN-authenticated debit transactions on their signature rails. Visa currently has this in place with its PAVD (PIN-Authenticated Visa Debit) option. PAVD enables a merchant to optionally authenticate the cardholder with a PIN at the POS for Visa debit cards, providing an additional routing option on all Visa debit cards.
Conversely, PIN/POS processors are beginning to offer PIN-less debit processing so that debit card transactions without a PIN can be authorized and processed on a PIN network rather than via Visa or MasterCard's signature rails. While this functionality has been available for years in the bill pay category, it has recently expanded into card-not-present and even card-present categories. This means smaller merchants who don't have PIN terminals will be able to choose to route transactions over the PIN rail rather than the brands' signature rails.
To understand the real financial impact of Durbin, CUs must analyze their transaction data and find out how their portfolios are faring within the new environment.
CUs can analyze portfolio transaction data for key points of impact, including:
* Changes in volume of different transaction types (PIN/POS, signature debit or PAVD) and trends toward or away from any particular network or transaction type.
* The effective rate of interchange for each transaction type and how it has changed over time.
* The overall blended interchange rate for their portfolio.
This analysis will provide a clear picture of the expenses and fees associated with different transaction types and should be performed on an ongoing basis.
Overcoming Compressed Interchange
Combating compressed interchange is a numbers game. As rates go down, credit unions will need strategies to increase interchange through greater transaction volume, while decreasing costs where possible.
Credit unions can increase transaction volume by migrating cash and check consumers to debit and credit card usage. Currently, approximately one-third of consumers do not use debit cards. Migration can be encouraged through rewards incentives, increased daily spending limits, fraud detection features like mobile alerts, and remote cash back at POS. Targeted campaigns can be used to penetrate merchant categories where consumers typically pay cash. An additional conversion opportunity exists in bill pay, where paper checks account for more than half of all payments.
Usage campaigns aimed at higher ticket transactions, such as e-commerce, travel, healthcare, and dining can also be effective.
When it comes to changing cardholder behavior, rewards often yield results. Implementing rewards programs can steer cardholders toward the specific transaction types, such as quick-service restaurants and gas stations; encourage preferred processing methods, such as signature rather than PIN/POS; or even incentivize current debit-only members to open a new CU credit card.
In addition to maximizing revenue opportunities it is important for credit unions to also minimize expenses. Evaluating the efficiency of operational processes can yield cost savings that will offset interchange pressures.
Low-touch functions that can be done efficiently and effectively by an outside expert should be considered for outsourcing-as long as the member experience is not compromised.
Finally, it is important to actively manage PIN/POS network relationships to ensure you are getting the best possible rates.
Bill Lehman is VP Portfolio Consulting with CSCU, St. Petersburg, Fla.