By Ray Birch
RANCHO CUCAMONGA, Calif.—It’s been more than seven years since the Durbin Amendment was passed by Congress, and it’s never been more important for credit unions to continue to focus driving transaction volume to keep debit interchange revenue at current levels, asserts one analyst.
Adding emphasis to the importance of that focus: one new report reveals debit and credit card transactions are down and fee income from cards is commoditizing. The study also shows how much ATM income dipped 6% from 2015.
CO-OP President and CEO Todd Clark spoke with CUToday.info about where debit interchange stands post-Durbin—a topic closely followed in the years immediately following the Durbin rules’ passage in July of 2010.
For some time most credit unions—those under $10 billion in assets—were supposedly protected under Durbin from the rule’s 24-cent debit interchange ceiling. And for a short period, CUs’ per-swipe fees remained unchanged.
But as deals were struck among the big and small networks with merchants, not only giving merchants a lower fee schedule but greater routing options, debit interchange for smaller institutions began steadily falling.
Now more than seven years later, Clark says that it has become all too clear that credit unions must continue to find ways to make up for declining debit interchange pricing with volume—greater penetration, activation and usage—a philosophy CU with which card managers have become all too familiar.
Booting Debit Transactions
As CUToday.info has reported with ongoing coverage, credit unions have done a good job of increasing their number of debit transactions, some with unique incentives to encourage additional swipes. But Clark looked back on what the Durbin rules were intended to do, and what really occurred.
He said that one of the biggest unintended consequences of Durbin is that the very big issuers, those targeted by the new interchange rules, have been able to strike deals with networks to keep their interchange swipe fee at the Durbin 24-cent ceiling. That has left the smaller issuers as targets for declining rates.
Clark emphasized that the last Federal Reserve study on interchange shows that the overall average for a single-message debit swipe—across all issuers of all sizes—is now 24 cents.
“That $10-billion demarcation line the rules set to protect the smaller issuers has not protected them,” said Clark, noting that smaller issuers were concerned from the start about the Durbin legislation’s ability to shield them. “The big banks of the world are demanding a 23-24 cent guarantee from the networks to even participate. So where does that leave the smaller guys? It leaves the smaller institutions to be the only point of negotiation the networks have with the big merchants of the world.”
Clark emphasized that with the steady pressure on debit—and now credit—interchange, swipe fees will only continue to drop, noting that card interchange across the globe is generally below U.S. levels.
“There is global pressure for interchange to fall,” he said. “In virtually all of the modern countries across the world, interchange is lower than what we have here. That is why it’s so important for credit unions to focus on card penetration, activation and usage.”
As some experts pointed out in previous CUToday.info reports, Clark said that credit unions have a big opportunity to increase credit card penetration among their members, and in doing so, make up for falling debit interchange.
“I believe the average credit union’s credit card penetration percentage among its membership is in the teens,” said Clark. “There is a lot of opportunity there.”
Clark emphasized, however, that moving forward CUs should largely focus on moving member transactions away from cash and paper.
“In this case, all boats rise,” said Clark. “Overall card usage is what you want to encourage.”
Value First
But credit unions will need to make sure they deliver value.
“There will always be downward pressure on interchange, and it will be incumbent upon us to continue to deliver value—not only to the cardholders but to the merchants, as well, to keep interchange and a reasonable level,” Clark said.
A new report from Cornerstone Advisors points to the interchange challenges ahead. The company’s 2017 Performance Report study of Mid-Size Banks shows that debit and credit card transactions are down and fee income from cards is commoditizing. The study also shows that ATM income dipped 6% from 2015.
"Banks that don't actively manage payments growth can expect a 1%-3% decline in payments income in 2018," warned Cornerstone’s Tony DeSanctis.