By Ray Birch
ST. PETERSBURG, Fla.—Large merchants are beginning to cut deals with Mastercard and Visa for preferential credit interchange rates.
The result is compression in credit card interchange, reports PSCU, which says the deals are concerning on several fronts. Not only are issuers making less interchange, but attractive credit card rewards programs are becoming more costly. As CUToday.info has reported, a rewards battle is taking place among large issuers that are spending heavily to create programs to keep their plastic top of wallet.
The shift comes at a time when many issuers are placing greater emphasis on credit card transactions to help offset declining debit interchange. Jeff Rosenbeck, leader, PSCU enterprise analytics and business intelligence, points out that these types of merchant deals have already occurred with debit, and now appear to be making their way to credit.
“I can’t be certain, but in my opinion I’d expect these types of deals, where large merchants receive preferential credit card interchange rates due to their volume of transactions, will only increase,” said Rosenbeck.
Pay Attention To Shift
Rosenbeck emphasized that credit unions should be paying attention to this interchange shift and look at ways to address cardholder behavior, rewards program pricing, and analytics to dig deeper into transaction data.
Rosenbeck explained that when he and other PSCU staff were researching a white paper on holiday card spending, the group spotted the trend. He said they noticed that the typical fluctuations in annual credit card interchange levels were off from what has been considered normal in the past.
“We saw a noticeable drop, and a demonstrative one in two merchant category codes—bookstores and wholesale clubs,” he said.
Rosenbeck said PSCU believes a deal cut by Costco with the two major payments networks is the reason for the marked decline in the wholesale clubs interchange category.
“Costco accounts for 60% of the volume that runs through this category,” Rosenbeck said.
In the bookstore category, the culprit is Amazon, which accounts for 90% of the credit card transaction volume there, Rosenbeck explained.
Issuers should be concerned, especially for their credit card rewards programs, Rosenbeck said.
“When you get this kind of compression on credit card interchange your rewards programs become even more costly,” Rosenbeck said. “For example, if you are giving 100 BPs in redemption and only getting paid 35 BPs at Costco, you are underwater right there.”
While concerning, Rosenbeck said the trend should not stop CUs from offering strong rewards programs, as such programs are necessary today to compete and keep the CU’s credit card top of wallet.
“But you should consider how you mitigate this; possibly restructure the rewards program,” Rosenbeck explained. “Maybe see what creative ways you can move volume away from low-yielding merchants.”
Change Behavior
Trying to change cardholder behavior is difficult to do, acknowledged Rosenbeck, adding that it may not be the best strategy to try to encourage members not to use certain merchants. Instead, Rosenbeck believes it is better to reward cardholders for choosing merchants that provide higher credit card interchange.
“Maybe give cardholders two points instead of one for every dollar they spend at local, small businesses,” proposed Rosenbeck. “That also supports the credit union mission to back local merchants.”
Rosenbeck also suggested that programs to boost card usage by revolvers—generating higher balances—can help offset the interchange decline.
Rosenbeck emphasized that credit unions need to get in front of this potential growing issue instead of just “letting it happen.” He suggested that a strong analytics platform, which PSCU offers, allows credit unions to dig down deeper into the transaction data and spot these kinds of trends and also shifts in cardholder behavior.
“I think it is critical now to move past just looking at the topline transaction data,” he said. “Robust analytics are very important.”