How to Optimize Debit Card Profitability & Interchange Income

Dan Fisher

With over 35 years in the financial industry, Dan M. Fisher has proven himself as a leader in the financial industry holding roles as the former director of the Federal Reserve Bank of Minneapolis and former Chairman of the ABA Payment Committee.

Who does your debit card processor work for? The merchant or your community bank or credit union?

Financial institutions have begun to realize that their interchange income has significantly declined, and they are beginning to ask questions. Most financial institutions receive their interchange income as a credit on their monthly EFT invoice. But how are they supposed to figure out what they’re actually receiving?

Fees are up, income is down, volume is flat, my transaction activity is changing and fraud is becoming a challenge again.  What is happening? Your frustration is not new and most community banks struggle with the same issues, and, like you, they do not know how to resolve it. You may think it is complicated, but not really. It takes a little time to study, but ask your association to help you because they generate revenue from these vendors, too.

Things You Need to Know

1. PIN POS Industry network (low interchange rates) volumes are growing and signature volume (high interchange rates) are declining.

What you need to know: There is a reason for this volume shift and you are not going to like it. Your interchange income is decreasing because more transactions are being routed using the Pinned POS network rails and by-passing Mastercard and Visa.

2. PIN POS Networks have expanded their use of PINless debit transaction rules and have blamed Dodd-Frank (aka. The Durbin Amendment).

What you need to know: The Durbin Amendment and Reg. II have nothing to do with PINless debit rules. It does state, however, that an Issuer must enable at least two unaffiliated networks on the back of the card.

From the Fed Commentary:

Section 920 and Regulation II prohibit any issuer or payment card network from directly or indirectly restricting the number of payment card networks on which an electronic debit transaction may be processed to less than two unaffiliated networks (i.e., prohibits network exclusivity arrangements). To comply with the rule, an issuer must enable at least two unaffiliated payment card networks on each debit card. In addition to plastic cards, the other payment codes or devices, such as the card number or a key fob, that are issued or approved for use through a payment card network to debit an account must be enabled to process transactions over at least two unaffiliated payment card networks.

Answer: If you have two non-signature (not PINless) payment networks enabled on your card, then you comply!

3. PINless debit network rules encourage acquirers and merchants to switch more volume to a specific network because the Pinned POS network charges the acquirer or merchant less than brand networks (Mastercard or Visa).

What you need to know: A PINless debit transaction rule places the issuer at a disadvantage and by-passes PIN security on the card regarding the EMV chip and on the network file (PIN File) if the magstripe is used. More importantly, the issuer does not have any chargeback rights for most of these transactions. You eat the loss even if it is a counterfeit card or fraudulent transaction.

4. PINless debit rules by-pass the EMV Chip security issuers have been required to invest in.

What you need to know: Some PINless debit rules increase your liability, and circumvent EMV security.

5. Every network processor requires the issuer to abide by the network rules as a condition of participation in the network.

What you need to know: These rules can be unilaterally changed by the processor without your approval and do not always favor the issuer. The net result is that you are stuck until your contract is up and you decide to leave. Processing vendors are slow to compromise when they have you by the contract. So, when your time is up, you can let your feet do the talking!

Controlling and managing your debit card portfolio is paramount to your profitability, and vendor management is key. Debit card interchange for exempt financial institutions (less than $10 billion in assets) can be one of your most profitable products and in a very big way! The income potential is huge!

Right now, processor network rules, acquirers, and merchants have the income advantage, because most often times vendors make things purposefully complicated to fool you. The result is that issuers are feeling helpless to do anything about it and just throw up their hands in defeat. It does not have to be that way, however.

So, here’s the question: Who does your card processor work for? The merchant or the community bank or credit union?

Looking forward, if you want to take control of your debit card portfolio, you need to visit with an expert. We understand the rules, we can explain them to you, and we can help. Send the Wombat a message at Dan@copperrivergroup.com and we’ll get back to you.

The Wombat!

Dan Fisher

With over 35 years in the financial industry, Dan M. Fisher has proven himself as a leader in the financial industry holding roles as the former director of the Federal Reserve Bank of Minneapolis and former Chairman of the ABA Payment Committee.