We’ve been preaching for some time the importance of closely tracking vendor contract amendments, subtle moves in transaction volumes, and other sometimes overlooked changes that can translate to meaningful shifts in a financial institution’s (FI) cost base and affect vendor relationships. We now have a real-time cautionary tale to help drive this point home.
Many PIN debit networks have begun rolling out expanded routing options for the processing of debit transactions. Essentially, this amounts to opening up a new signature debit (dual message) alternative processing option to the traditional global network brands usually used.
PIN networks are touting this change as being a benefit for merchants and consumers by giving both groups access to more options. In conversations with FIs, they suggest the change will likely lead to increased interchange revenue or be net neutral at worst. What these assertions overlook is the potentially critical nuances embedded in many FI card brand agreements. Let’s explore further.
The Three (or Four) Headed Monster at the Point of Sale
The economic dynamics of a card transaction are unusually complex, due to the number of stakeholders involved. At the point of sale (POS), you’ll find cardholding consumers transacting with merchants. Facilitating the sale is the card issuer, and in nearly all cases an FI. In the background is the card network, which brings all these pieces together.
In a post-Durbin Amendment world, it’s the merchants who decide which routing network to employ. Naturally they’ll favor lower-cost channels, which typically equate to lower interchange and fee revenue for FI card issuers. It’s conceivable that by shifting the mix toward signature (as opposed to PIN) debit transactions, direct interchange revenue may be preserved or potentially tick upward.
However, this logic fails to consider any contractual reduction in fees or incentive agreements the FI may already be receiving from the global networks. Lower volumes routed to these networks could mean missed incentive payouts, as well as reduced vendor contract negotiation leverage at the next renewal.
Meanwhile, consumers are probably fine with any routing solution so long as (a) their card continues to work seamlessly, and (b) they receive whatever rewards they are used to receiving. For these reasons, while interchange skirmishes are typically instigated by the merchants, the current battle could be shifting to the card networks processing market share.
I Told You. You Just Weren’t Listening
In most cases, these processing changes can be implemented without FI consent; however, they do normally require notification. This is another area where we counsel added vigilance because chances are such notifications are routed to the FI’s legal team and could be worded in such a way that the business substance of the change is unclear. It could be that no one in operations will be made aware of the change, and that the underlying volumes shift so gradually that it goes unnoticed until it’s too late to act.
We’ve found that in some cases, FIs can opt out of these amendments. At minimum, FIs should be aware of the changes and factor them into planning and payment strategies. By signaling that they are aware of these ongoing shifts in market dynamics, FIs also better position themselves for the next vendor contract negotiation.