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Protecting Debit Card Interchange Revenue

A Snarketing post by Ron Shevlin, Director of Research at Cornerstone Advisors

A recent survey of credit union executives conducted by Aite Group and Filene Research found that roughly eight in 10 respondents said that growing debit card interchange revenue is “very important” to their firm’s revenue growth plans for 2014. I would bet that plenty of other FIs (especially those with less than $10b in assets) would say the same.

What are FIs doing to drive debit card usage? Seems to me that some (if not many) are simply hoping that past trends will continue into the future. Not a good bet.

My take: There are trends in place that will challenge the upward trend in debit card interchange for FIs with less than $10b in assets. FIs will need to take steps to protect their debit interchange revenue.


20140513 Payments2One of those trends is the declining growth rate in debit card transactions From 2006 to 2009, debit card transactions in the US grew by 48%. From 2009 to 2012, that rate slowed to 25%. This can be explained in part, of course, by the fact that as the base grows, a similar increase in the second period will produce a lower rate of increase.

But it’s important to see what happened to other forms of payment. From 2006 to 2009, credit card payment volume declined by 3%. From 2009 to 2012, it grew by 25%. Prepaid debit card volume, which increased by 228% from ’06 to ’09, grew 48% from ’09 to ’12.

Two things are happening there: 1) Consumers discovered prepaid debit cards, and 2) Gen Yers rediscovered credit cards. And if your credit union or bank doesn’t have the credit card and/or prepaid debit card relationship, you risk losing debit card interchange revenue.


Another trend bubbling at the surface is the threat of a return to cash. In the wake of the Target, Michael’s, Sally Beauty Supply, and Neiman-Marcus breaches (did I miss any?), a survey of consumers found that only 39% of respondents are “very confident” in the safety of using debit and credit cards, and that 32% said that they would be using cash as a method of payment more frequently.


What’s an FI to do? A debit card rewards program might help. Six of 10 FIs with a program in place find it effective for driving card usage (the other 40% may have a poorly designed program, or don’t effectively market it).

Just one-third of credit unions, and 37% of banks, have a debit card rewards program, however, according to the 2014 Financial Brand/Aite Group survey of marketers.


If you don’t want to implement a debit card rewards program…and you don’t want to start pushing credit cards on your customer/member base…and you don’t believe the prepaid debit card opportunity is particularly big (note: few of the credit union execs surveyed by Aite Group and Filene listed prepaid cards a a new product/service idea for 2014)…then the least you could do is help your customers/members regain trust in their debit cards.

However, if you’re going to rely on MasterCard and Visa to track and report breaches to your cardholders, you’re in for bad news. According to my Aite Group colleagues, the majority of card fraud is detected by cardholders–not FIs, and not the networks.

To protect interchange revenue (for either debit or credit cards), FIs should encourage their customers to register their cards with BillGuard. I wrote about BillGuard back in January after Target announced it would provide credit monitoring to the people impacted by that breach. Unfortunately, monitoring isn’t the solution to this growing problem.

This seems like a no-brainer to me. Help protect your customers, and you help protect your interchange revenue. What am I missing here?


Bottom line: The debit card interchange crazy train could be going off the rails. If this is an important source of revenue to your FI, you’ve got to take steps to protect it.


Ron ShevlinRon Shevlin is Director of Research at Cornerstone Advisors. Get a copy of his best-selling book, Smarter Bank: Why Money Management is More Important Than Money Movement. And don't forget to follow him on Twitter at @rshevlin.

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  1. Assuming that cash withdrawals from ATMs, an important source of debit card transactions, have been removed from the above table showing the # of payments, I’ve always wondered how debit card managed to overtake credit card in transaction volumes in the first place despite not offering any rewards. Will that driver alone not suffice to keep the debit interchange gravy train on track going forward? I’m especially keen on knowing this since (I believe) debit interchange is lower than credit interchange even for CUs that’re outside the coverage of Frank-Dodd-Durbin, thus posing challenges for funding debit card rewards from debit interchange. While on the subject, I’m also curious to know your thoughts about FIs turning to Cardlytics and other 3rd party platforms that fund rewards from merchants instead of digging into their interchange revenues.

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