The increasing popularity of debit isn’t just a way for issuers to attract and retain customers. It’s also an opportunity to capture a growing source of revenue.
As debit spend grew during the pandemic, debit interchange contributed one-third of non-interest income for those smaller financial institutions exempt from the Regulation II interchange cap, according to the 2021 Debit Issuer Study, commissioned by PULSE® and conducted by Oliver Wyman.
For issuers, this represented an important income stream during a time of economic uncertainty. Issuers looking to capitalize on the trend need a solid understanding of the impact of a robust debit program on their bottom line, as well as what to look for in a network partnership.
“We believe debit is going to remain at the center of the consumers’ financial lives, and as a result, it will remain a key financial generator for issuers.”
- Steve Sievert, Executive Vice President, Marketing & Brand Management at PULSE.
Debit Non-Interest Income Grew in 2020
Consumers spent more money with their debit cards in 2020. Consumers are also increasingly comfortable using debit for card-not-present (CNP) purchases, which have ticket sizes that are 80% larger than for card-present transactions, according to the study.
As CNP spend grew dramatically during the pandemic, debit became an even more important factor in issuer economics. This is especially true for exempt community financial institutions – those with less than $10 billion in assets – as their debit revenue is more heavily influenced by total debit spend.
With debit’s rising popularity, these institutions and other exempt issuers saw a significant uptick in interchange revenue in 2020 – translating to a 13% year-over-year increase in gross revenue generated per consumer debit card. All told, debit generated one-third of non-interest income for exempt issuers, versus 25% in 2019.
Average Gross Interchange Revenue Per Active Card Per Year
But even for larger, non-exempt financial institutions, debit’s contribution to non-interest income increased in 2020, according to this year’s debit study, growing to 7 percent from 5 percent the year before as other sources of non-interest income declined.
The Importance of Being Top-of-Wallet
Being top-of-wallet for consumers, especially with the rapid rise of CNP transactions, is essential. Those that succeed at becoming the customer’s card of choice are focused on giving them the frictionless payment experience they seek across buying channels, both online and in-store.
In today’s world, that means cutting-edge fraud detection and contactless card and mobile wallet functionality. Issuers that wait to upgrade in either area could miss out on an important source of revenue now and suffer longer-term consequences as well.
“If this opportunity to meet the contactless moment passes them by, they could wait months or years for another chance at becoming top-of-wallet,” Sievert said.
That would be a significant loss, because revenue from debit interchange has the potential to increase, Sievert explained, especially for exempt financial institutions as CNP ticket sizes continue to grow. And as more consumers embrace the convenience and real-time spend visibility that debit offers, non-exempt issuers – whose income is driven more by the sheer number of transactions – will profit, too.
Understanding the Drivers of Debit Revenue
But interchange income isn’t the only relevant factor in debit revenue. “Continuing to grow interchange income in this environment is actually very difficult,” said Sievert, “it is vital to evaluate your program management fees, as well, because they also have a significant impact on the net economics of your debit program.”
Because operating expenses reduce debit income, managing fees well is key – and choosing the right network partner is an essential part of that equation. PULSE and Discover® Global Network, for example, work closely with issuers and acquirers to create collaborative partnerships to mutually benefit outcomes.
When gauging the quality of a network partnership, it’s important to understand the fine print of the agreement. There might be weekly, monthly, quarterly or annual assessments to sort through, or contractual obligations for volume level commitments, and related charges if they’re not met.
The ultimate goal is to become as familiar as possible with each contributing revenue generator and expense. If warranted, renegotiating the network contract should be considered to get the most value out of the program.
“Don’t just jump into auto-renewals because they are convenient,” Sievert suggested. “Make your program work for you.”
The Bottom Line
Debit remains consumers’ payment method of choice – across regions, and for both card-present and CNP transactions alike. In response to these shifting spending patterns, debit issuers large and small are racing to become top-of-wallet. Those that succeed, by upgrading their technology to meet the needs of today’s cardholder while negotiating a favorable contract with network partners like PULSE and Discover, can look forward to increased profits in the years to come.