Debit card interchange income is the top contributor to deposit-based non-interest income for most banks, and if it’s not for yours – you must ask why! Two factors make debit card interchange income a smart thing on which to focus growth efforts. First, interchange fees are not paid by your customers (see “What is Interchange Income and How Do You Calculate It? – Profit Resources, Inc” for more information on interchange). Second, it continues to grow organically even as it normalizes post-COVID. For example, Visa system debit card spend is growing an average of 5 to 7 percent annually, as spending per card grows with new acceptance locations. Because of this, interchange income is an important revenue stream that deserves closer examination by every financial institution.
Phil Jarrell, debit card services expert at PRI, says there are several areas of the debit card business that can represent significant revenue growth opportunities for banks.
- Optimize the signature network.
Optimizing the relationship with Visa or Mastercard for example, can result in up to a 25% increase in signature debit revenue. Termed agreements should be negotiated with the full financial impact including net interchange revenue factored in.
“If you haven’t negotiated effectively with your signature network, you could be leaving a lot of money on the table,” Jarrell said. “Small community banks must realize the value of having the network on their debit cards, to both the network and the bank, and negotiate fees, signing bonuses and marketing support. Good vendor management and contract negotiation will allow you to maximize the incentives and benefits.”
- Optimize the PIN POS network.
Interchange revenue, switch fees and incentives, which can be quite different between networks, must be considered. There are significant differences in interchange between PIN networks, and which PIN network is chosen can impact the higher interchange brand/signature spend on your cards.
“It’s not necessarily in your best interest to just take the PIN network of your processor,” Jarrell said. “These agreements should also be negotiated based on your full financial picture.”
- Evaluate EFT providers.
EFT providers, who process debit card transactions for the bank, should also be evaluated with an additional focus on debit processing expenses. While many FIs don’t pay attention to this level of detail, they should look at the full picture to ensure they’re not paying too much per transaction. EFT costs provide additional opportunities to save money and increase profit.
4. Clearly communicate debit card value propositions.
Debit card value propositions should be clearly communicated and reinforced with customers and well understood by employees to improve card adoption and performance. An ongoing effort must be made to promote convenience, any bank-offered rewards if applicable, liability protection and general acceptance of debit cards to customers. Marketing promotions with incentives, sweepstakes, etc., can also effectively increase spend. Without this focus, the debit card program – and the interchange income revenue – can suffer.
5. Report results simply but comprehensively.
Banks should incorporate debit card financials and key performance drivers into standard bank reporting, with targets based on benchmark comparisons to identify and prioritize opportunities.
“Debit card interchange income – even for small banks – can be upwards of $1 million, but it’s often not reported to the Board and may be buried within ATM reporting,” Jarrell said. “Reporting and tracking debit card income and expenses separately allows banks to realize the full value of their debit card product and set goals and targets to manage to.”
It can be difficult to get good, clean data and deciphering reports and measuring results requires skill and patience. Debit card processors and networks provide reporting, which can be used to track usage and performance. Banks should work with their vendors to make sure these reports are accessed and understood. Vendor data should be combined with invoice/expense data to get the full picture of the debit card business.
Profit Resources specializes in identifying profitability improvement areas for financial institutions through revenue growth, cost control, streamlining processes, and effective use of technology. Contact us to learn more about our personalized approach to propel growth and improve profitability.