Why Banks Should Pay Attention to Their Debit Card Programs

Revenue from debit card interchange often accounts for a significant portion of a bank’s non-interest income. Debit card interchange is being compressed for all banks due to the regulatory changes implemented in 2011 that directly impacted interchange rates and network routing practices.  Interchange compression is very similar to net interest margin compression. It occurs when gross interchange revenue is lessened over time while the expense to process a debit card transaction either remains constant or increases.

Bank management teams need to fully understand and analyze what is happening to net debit card interchange revenue in order to combat interchange compression and resultant net non-interest income decreases.   With the proper data and analytics, banks then can work with their processing vendors, network partners, and card issuer to strategically grow debit card revenue and reduce related operating expenses which are contributing to this type of net non-interest income decline.Here are some recommendations on how banks can generally begin to evaluate their debit card portfolio to reverse interchange compression:

  1. Review invoices from your card processor to understand what per transaction processing costs are;
  2. Examine billings from your card issuer (e.g. Visa or MasterCard) to see what additional fees and assessments are paid on top of processing costs;
  3. Understand interchange revenue realized from both PIN and Signature based transactions (signature based transactions create higher interchange income per transaction than PIN based transactions);
  4. Measure fraud losses resulting from debit card sourced Regulation E claims;
  5. Determine debit card penetration by evaluating checking account customers that have actively used debit cards as compared to those who do not;

The recommendations above are just a start.  Once you begin inspecting the details, you and your management team will discover more about how your debit card portfolio performs. Understanding what drives portfolio’s performance will prompt you to do additional analysis and compare your bank’s performance against industry benchmarks.  Visa and MasterCard can supply industry-wide averages and benchmarks as can your card processor.  You may also consider subscribing to studies such as Cornerstone Advisors, Accenture, Forrester, and others.  Compare your bank’s performance against these benchmarks to see where strategic focus is needed and how you can drive higher transaction volumes and improve net interchange income.

Understanding your debit card portfolio behavior on a more granular level will increase your chances of bringing more non-interest income to the bottom line.  Try tracking the metrics shown above each month and get familiar with the dynamics of your debit card portfolio.  Make interchange and debit card trending statistics a part of regular strategic conversations with management and the board of directors. Renegotiate terms with your processor and issuer to reduce costs and increase growth incentives once you have a good grasp of trends and costs.  Develop specific marketing strategies to improve customer penetration and the volume of debit card usage across your customer base.  Increased visibility and management of debit card usage and interchange revenue data will certainly improve your bank’s opportunity to lessen processing costs and increase interchange revenues into the future.   

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