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The winds have shifted since 2020 made game-changing waves in debit card usage on multiple fronts, including:

• In-person versus online spending
• Categories of merchants patronized
• Contactless/mobile app adoption

Each of these factors carries implications for banks, credit unions, and other card issuers and their existing revenue models. Below are a few opportunities and recalibrations to consider for your next PIN network vendor negotiation.

Top-of-wallet status is highly coveted because, once achieved, the incumbent – in this case the card issuer - has the advantage. Old habits die hard. Once a consumer develops a “go-to” card for certain types of purchases, they tend to repeat that pattern of behavior.

Those habits can be cultivated by offering benefits to the user via a rewards program. Sometimes the choice can be situational, with cardholders designating certain cards for specific types of purposes. This may extend to the type of card – e.g., debit or credit – and/or a workflow established by the merchant which makes it easier to use one card rather than another – e.g., Walgreens Express Pay.

It had long been predicted that the next U.S. economic downturn would be far less severe than the one triggered by the 2008 financial crisis. What wasn’t predicted, however, was the emergence of another “black swan” event like a coronavirus pandemic. Although the underlying fundamentals remain quite different, banks and credit unions everywhere should consider a few lessons learned from 2009-11 while they adapt their institution’s business model to the new norms of consumer behavior.  

Card-issuing institutions of all stripes (yes, a payments pun) are in store for some interesting times. According to SRM’s findings, a disproportionate number of card branding agreements are coming up for renewal over the next 12-18 months. Why is this important? Consider the timing.  These contracts, commonly signed with MasterCard and/or Visa, tend to be long term in nature and govern a large – and growing – share of non-interest income. As SRM witnessed during economic recovery from the 2008 financial crisis, properly realigning your bank or credit union’s critical card branding contract with the market, as well as other payments agreements, can uncover hundreds of thousands in both cost savings and revenue growth. 

It’s fascinating how quickly economic tides can turn. For the past decade, banks and credit unions have been focused on lending—first in shoring up the quality of their portfolios, then in attracting new customers to prudently expand loan activity. With rates now on the rise and net interest margins widening, however, attention has shifted to attracting and retaining deposits.

Most bank and credit union leaders are familiar with ways to optimize their credit card programs, yet surprisingly few of them apply any transferrable techniques to their debit portfolios. Debit interchange is the first or second largest component of non-interest income for most financial institutions, so even nominal improvements can drive big benefits. Although credit card purchases generate more interchange on a per item basis, the reality for many smaller institutions is that they have more tools at their disposal to influence debit use.

The same PAU metrics (Penetration, Activation, Utilization) familiar to credit card program managers can be applied to debit. Let’s look at how these concepts can improve P&L:

In a recent blog I noted that many financial institutions (FIs) continue to process debit transactions through four or more PIN networks, mainly due to inertia. There are numerous reasons to streamline this process — volume discounts, simplified back-office routines, reduced risk — none of which carry customer impact. Most networks no longer require their logos to be listed on the back of the card, so there’s not even a need to reissue plastic.

Americans of a certain age recall the not-so-distant days when one had to check the logos (“bugs,” in banking parlance) on the back of their card to confirm it would work at a given ATM machine or retail terminal. For this reason, financial institutions (FIs) join multiple networks to ensure sufficient reach for customers, particularly those who traveled outside their home region. As a result, the multitude of bugs on the back of cards made them look like a NASCAR driver’s coveralls.

To say that some financial institutions (FIs) have an unhealthy obsession with the Durbin Amendment is not a stretch.  These FIs have been watching and waiting hopefully at a brief window of (probably unrealistic) hope that the new administration would repeal the amendment. The reality for all FIs, however, is that aside from some regulatory relief around the edges, there’s little reason to expect meaningful action on the regulatory front until after the 2018 mid-term elections.

For nearly all banks and credit unions, debit interchange ranks alongside overdraft fees as one of the two leading sources of non-interest income, yet few financial institutions (FIs) have actually analyzed the underlying dynamics of their interchange programs.

Since debit interchange revenue has been on a solid, upward trend for decades – with one notable exception – it is possible that some banks and credit unions have decided to leave well enough alone and simply enjoy the ride. In the meantime, however, soaring consumer volumes have masked some less favorable changes in rates and product mix beneath the surface, and FIs that fail to actively manage their debit portfolios are likely leaving money on the table.