ARLINGTON, Va.-One year after the implementation of the Durbin Amendment rules and the outlook for CU debit interchange is mixed, with transaction-driving strategies working amid concerns about whether the extra usage is driving sufficient revenue to overcome shrinking per-swipe income.
A recent NAFCU study of its membership pointed to some good and bad news, showing credit unions doing a good job of increasing debit transactions. However the gross revenue pulled in from the additional transactions may not be enough to cover the additional processing costs, the study says (Credit Union Journal, Sept. 19).
At the same time, a study by Moebs $ervices shows that all financial institutions, including the big banks, will make more in debit interchange than they ever have within the next year.
The NAFCU study shows that credit unions have increased their debit interchange revenue since last year's enactment of the Durbin cap on interchange because of a rise in transaction volume, even though per-transaction fees have declined for many. The report shows almost 21% of credit unions reporting a decline in per-transaction debit income. But a clear majority, 53.1%, of credit unions surveyed reported an increase in monthly income from debit, indicating that transaction volume has increased. However, while gross income related to interchange fees may be rising, in many cases it is not sufficient to cover costs of processing additional transactions, according to the study.
Fred Becker emphasized that debit programs remain a valuable tool for CUs, especially as credit unions maintain a pricing advantage over big banks, which had their swipe fees cut from an average of 44 cents to 21. Under the Durbin rules, FIs below $10 billion in assets-despite market pressure forcing all swipe fees down-have no cap.
'Significant Cost Advantage'
"With the exception of a few very large credit unions, we do have a significant cost advantage over the bigger banks. I don't think credit unions today realize how well positioned they are in the marketplace and they need to take advantage of that opportunity because the banks will recover," said Becker, noting the recent GAO report on debit interchange that shows institutions below $10 billion are feeling some interchange squeeze due to merchant pressure.
But examining Fed data through the third quarter, Michael Moebs contends concerns over debit interchange revenue should not be that great, and that by 2013 financial institutions will make more debit interchange ($21 billion) than they ever have-the previous high was $18.18 billion in 2010. Moebs also projects that by 2014 FIs will make $23 billion in interchange revenue, and $25.6 billion by 2015 (see chart).
"We have been crying over milk that has never really been spilled," said the economist and CEO at Moebs $ervices, Lake Bluff, Ill., referring to the Fed data. "All financial institutions took a small hit in 2011 and a bigger one this year. Those are felt, certainly. But let's not talk about what we could have had. Let's talk only about what we lost, and then look at what we are going to have next year. Overall, the damage was not as bad as everyone thought. We will work this out earlier than everyone expected.
Moebs' study shows how FIs, especially the big banks that impact the data the most, will suffer a sharp loss in interchange revenue this year ($4.6 billion) but are coming back due to strategies to boost transactions, which already show banks and credit unions gaining $1.09 billion in extra revenue in 2012 due to the additional transactions. Moebs' study shows that debit transaction volume will rise this year by more than three-billion over 2011, and projects the figure to increase by a total of about 14-billion through 2015.
"The increase is coming from those who have had a debit card and are using it more and from consumers who are getting the card for the first time and using it," Moebs said.
In Des Moines Iowa, Jeff Russell sees CUs increasing debit transactions, but recognizes that a sizeable portion of the increase could be coming via small-dollar transactions.
"It has always been true that the mix of debit card transactions is important. I buy a 99-cent cheeseburger, then buy 66 bucks in gas, and $100 in groceries-that kind of mix is important," said the senior advisor for The Members Group, adding tactics to drive higher-ticket purchases should be included in transaction-driving strategies (see story, left).
The Downside to Options
Many experts acknowledged that the future of debit interchange is unclear. But Bill Lehman, VP portfolio consulting for CSCU, Tampa, Fla., said many CU he works with are recognizing they are not gaining as much as they expected from the increase in debit transactions. "They are telling me that their interchange revenue seems to be a little diluted, even though they are seeing strong transaction volume," said Lehman.
Lehman thinks one reason may be credit unions paying attention to the Durbin rule that they must now have at least two unaffiliated PIN networks on their card, but are not giving enough attention to choosing the most profitable networks or limiting the number of networks on the card.
"Remember, by not limiting the PIN networks on the card to two, you give more control to the merchant, who will always choose the least-expensive route. They now choose the routing option, not the issuer, and if you give them too many choices you are giving them more options to reduce your interchange revenue."