This is Your Debit Card Wake Up Call

Banking Exchange posted a blog regarding the very real drop in debit card interchange that FI’s of all sizes are experiencing. At issue is the way merchants are “smart routing” to their lowest cost option, depending on the available networks presented on the card. If merchants are paying less, chances are, issuers are making less:

The real culprit, however, is at the processor, with PIN-less debit programs and the re-direction of signature transactions away from the card networks and through network switches and paying less.

The net negative impact on your interchange income impact is huge.

During 2016 issuers (banks) that traditionally relied on signature transaction interchange income have experienced a huge decline and a volume shift from signature transactions to pinned transactions—even with debit cards being configured as signature preferred.

A typical volume split for our clients who implemented a signature preferred debit program had signature at about 80% of the total transactions, generating a tremendous amount of income. At least, that’s how it was.

However, with the PIN-less debit programs promulgated by processors gaining traction we have seen the signature percentage drop down to less than 65% of the total transactions or more.

The level of impact to interchange varies by financial institution based upon the transaction mix that an issuer experiences. If an issuer’s debit card cardholders tend to shop a very large merchant chains, then the impacted is muted, because these merchants have had low, negotiated rates in place and have already integrated the technology to seek out the least cost routing choice. These stores are already returning very low interchange revenue to issuers.

In order to lose as little as possible will mean that issuers will have to focus on fundamentals of product management and attract new cardholders, execute flawlessly to retain customers, and create strong loyalty to keep customers for the long term.

Overview by Sarah Grotta, Director, Debit Advisory Service at Mercator Advisory Group

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