By Ray Birch
SCOTTSDALE, Ariz.–Credit unions that have been content to sit back and make up for declining debit swipe fees with greater volume should more closely manage their debit program or expect a 1%-3% decline in payments income in 2018, insists one analyst.
Tony DeSanctis, senior director at Cornerstone Advisors, said that with debit usage rising—therefore keeping revenue stable—many credit unions have neglected tuning up their debit programs so they perform at a higher level.
“A rising tide lifts all boats, said DeSanctis. “Transaction volume is growing, so everything seems to be going well. Spend volume has been strong. So all that has made it a little easier to look at that 3% year-over-year debit card growth in volume and smile and be happy. But if you are not paying attention to the fact the debit market is growing by 7%, you are not realizing that you are actually behind the curve. These issuers are looking at absolute performance instead of relative performance—not understanding what the real expectations should be for their program.”
Assessing data from Cornerstone’s 2017 Performance Report study of mid-size banks and credit unions, DeSanctis told CUToday.info that issuers that don't actively manage payments growth can expect to see income decline in 2018.
“We did calculations and determined that is what will likely happen to you if you are not actively managing your debit portfolio and doing things to mitigate declining swipe fees,” said DeSanctis. “You will see a 1%-3% margin compression this year from the same volume that came through your systems last year.”
What perplexes DeSanctis is that interchange income is critical to credit unions, yet debit programs often receive very little attention.
“For smaller and mid-sized institutions, interchange income represents 25%-35% of non-interest income,” said DeSanctis. “There are very few things within the average credit union and bank that generate that kind of income, yet get as little leadership and management focus. This is not something you can set and forget. You have to be active and aggressive in managing this business because it’s changing so rapidly and dynamically.”
What should continue to concern issuers, said DeSanctis, is the further migration of signature transactions to PIN.
“PIN revenue is about half that of signature,” reminded DeSanctis. “This is a substantial issue.”
Merchants And PIN
Tony DeSanctis
DeSanctis emphasized that more merchants today are encouraging customers to use PIN, presenting them with that option on the payment terminal first, and then providing a way to choose signature.
“A lot of consumers, however, don’t know they have a choice and just use the PIN option,” he said.
What is really leading to the shift to PIN, as CUToday.info has previously reported, is PIN-less debit, where big merchants such as Walmart route all signature transactions under $50 over PIN rails without requiring the cardholder to enter a PIN.
DeSanctis also pointed out that moves by merchants to strike deals with the networks for lower fees, and to get more aggressive at steering transactions to the lowest-cost routing option, are adding to issuers’ interchange woes.
DeSanctis stressed that credit unions must actively manage their debit portfolio. Many of the tools to address declining swipe fees have been in front of credit unions since the Durbin rules took effect—and CUs must pay particular attention to merchant routing. As many experts have urged over the years, DeSanctis emphasized that it is critical credit unions limit the number of PIN networks on cards to limit merchant routing choice, and to also do research to determine what are the best networks for the credit union and membership.
“You still see a lot of institutions with multiple networks on their cards,” he said. “Back in the day, multiple networks were good. But today you need to analyze and evaluate which networks best suit the credit union and the membership base to make sure you get the right mix of volume and minimize the impact of some of these merchant deals and routing strategies.”
Right Type Of Spend
Actively managing the card base also means encouraging the right type of card spend.
“Look at the type of spend your members are doing and that will have an impact on your network selection,” said DeSanctis. “Also, think carefully about your messaging and marketing of your card to your members.”
For example, if the credit union and its members are located in an area in which Walmart is heavily present and members are spending a lot at this merchant that employs PIN-less debit, DeSanctis said the CU should consider ways to encourage and incentivize more “non-Walmart spend.”
“The same thing goes for Kroger and some of the other larger grocery store chains. You also have to drive some of those smaller-merchant and smaller-dollar transactions,” he said, noting that smaller merchants typically don’t have the sweet network deals.
DeSanctis emphasized that it’s no longer the best strategy for credit unions to do little to manage their debit programs and just try to “outrun” interchange margin compression.
“You have to manage the payments business, as debit has been under fire and now credit is heading that way as well,” said DeSanctis. “This is important. This is straight margin compression—and we are not even adding to the concerns the impact fintechs could have.”