By Ray Birch
ST. PETERSBURG, Fla.—Another analyst is waving a red flag over a dip in credit card interchange, saying it’s a sign that credit unions need to begin getting aggressive in the card on file space.
Brian Scott, SVP of sales and solutions consulting at PSCU, told CUToday.info he noticed the trend both in holiday spending data and in data around the start of 2017, saying the credit interchange decline illustrates how more transactions are moving to card on file as consumers use popular store apps, like those offered by Amazon and Costco. Scott recommends that credit unions spend money now to ensure they don’t get cut out of this space by competitors’ cards.
Similarly, CSCU’s Tom Davis also told CUToday.info in a previous report that the Internet of Things is driving up the number of card on file transactions.
“Going back to the holidays we saw, for the first time, credit card interchange trending downward,” said Scott. “Not because Visa and Mastercard are paying lower interchange rates across the board, but because people’s mix of spending has begun to change—spending picking up in places like Amazon and Costco with their store apps. This is causing overall credit card interchange to go down. It’s interesting what is happening.”
Durbin Impact
Scott noted that the Durbin rules have had their ongoing effect on debit interchange, slowly dragging revenue down in the category. But for credit cards, he reiterated, this is a first.
Brian Scott, PSCU
“This simply speaks to people’s spending habits,” said Scott. “Amazon and Costco, for example, have made huge inroads into people’s spending, as has Walmart. Amazon and Costco have deals for lower credit card rates with Visa and Mastercard, so as this spend shifts toward these stores, credit card interchange goes down.”
What this trend also speaks to, insisted Scott, is the importance of credit union issuers playing more heavily in the card on file space with the increasingly popular store payment apps.
“In the last two years people have talked a lot about card on file, but it was not driving significant activity within portfolios. Now it is,” said Scott. “Card on file business is really here now, and we saw its impact for the first time during the holiday season.”
Scott said this growing spend category is vital, since cards loaded into apps rarely get replaced with another card. In fact, studies show that about 88% of the time people spend via their store app they use the same card.
“That speaks to the value of card on file,” said Scott, who recommends that credit unions invest now in incentives to encourage members to load the CU’s card into store apps.
“This is one of those times when paying for playing in this space is effective,” said Scott, who is encouraging credit unions to begin devising card on file strategies before many others do the same. “Pay to get your card in, and once it’s there, it’s really sticky. This is a situation where a large incentive is valuable.”
Scott suggested that the credit union, if it offers points, award bonus points for members’ first two transactions within popular store apps, or a higher cash back percentage.
“Or maybe you pay $5 for each of the first two transactions. That may seem outrageous, but it ensures you get your card in the app, and then you have a high level of assurance that it stays there,” said Scott, adding that the credit union’s upfront investment is small compared to the return.
Scott, too, noted that as more credit union payment revenue comes from card on file transactions, that crooks are paying closer attention to this payment channel. He forecasts that attention will increase once more payment cards become chip enabled. Scott said that 63% of all cards have been converted to EMV. Credit stands at about 81%, debit is closer to 50%.
Scott believes criminals will turn attention more toward other payment channels, like card on file, when debit conversions top 80%.
Scott’s emphasis on credit unions staying competitive as new payments options gain popularity comes at a time when CUs apparently are making inroads in the credit card market.
“For the first time in a long time credit unions have actually gone up in credit card penetration. They have gained significant market share in both the credit and debit space,” he said. “Even in the Bank Transfer days, they were adding new accounts but they were not really growing their credit and debit card portfolios. So this is the first time they have seen an appreciable increase in market share. That may simply mean they are becoming more competitive.”