Optimizing Debit Card Profitability During M&A

In the rapidly shrinking banking industry, financial institution CEOs often ask what they should be looking out for to maintain or improve profitability during a merger or acquisition. PRI knows acquiring banks should keep an open mind when evaluating the acquisition target’s debit card profitability and learn what is working well for them, and why.

Three items to consider when entering the M&A process:

• Know thyself. To accurately gauge the impact of acquiring another FI’s customers, you should first know where your institution stands. How much is your FI netting per transaction or per debit card outstanding? What is it worth to the FI when it issues a debit card to a customer?  This concept is simple enough, but putting it into practice can prove difficult without the proper knowledge base. Know where you stand before the acquisition.
• Evaluate the income. If the evaluation of income per card reveals that the acquirer is making less per swipe than the acquired institution, find out why. The acquisition target may have better interchange rates because of a better network arrangement or even just better network agreement terms. Oftentimes, the acquired institution may have been doing a better job of marketing and getting cards into customers’ hands for use. Bigger does not necessarily mean better in this case! Choose the arrangement that is most profitable.
• On expenses, timing is everything.  While bigger FIs should have better rates on processing expenses, they don’t always, and should evaluate the contracts of the acquired institution to determine optimal pricing.  Further, the evaluation needs to consider buyout timing on both institutions’ card brand and interchange network agreements. Take into consideration termination penalties, but also the balancing effect of positive impact to incentive income of the acquirer’s agreements. Although the FI cannot disclose details of the M&A, they can keep the lines of communication open – there will be a sweet spot of timing in the profit optimization formula, and the FI will want an open rapport with their card-critical vendors.   

These profit centers are often overlooked in the M&A process, which tends to be geared toward share price and the details of the buyout. However, it is valuable to review debit cards for the long-term success of the M&A and not just focus on the deposits retained/lost when it comes to DDA income consideration.

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.