Divide and Conquer: A New Strategy for Taking Control of Your Interchange Income
The allure of "bundling" your debit card processing and debit network services can be appealing. Carefully examining the benefits as well as the costs of bundling requires first examining each service separately. While it’s easier to put it on the back burner and just not worry about it, debit revenue can make a significant impact to your bottom line and it is very likely that it’s worth your time. According to the 2020 Debit Issuer Study, debit interchange is a key driver of both DDA revenue and overall non-interest income for issuers.
Bundling is common
We’re familiar with the cable-phone-internet “triple play," home-and-auto insurance discounts, and value meals at the drive thru. The apparent savings associated with bundling represent a feel-good moment for any customer.
Not so apparent are the added charges and restrictions behind the scenes for what customers may think is just "set-it-and-forget-it." For a cable subscriber, the wrong decision may mean a few hundred extra dollars and hundreds of channels no one watches. For a bank or credit union deciding whether to bundle their debit card processing and network services, the costs in lost interchange revenue each year can be considerably higher.
Bundling caters to the natural desire to consolidate the pain points and be done with it, but that can be a mistake.
Clarity through unbundling
To get your debit contract deals to work harder for you, it's a good idea to look at your services independently. With commitment and focus upfront, carving out time to understand the fine print, processing and network negotiations can lead to considerable savings.
"It is imperative that a financial institution know for certain whether bundling makes sense prior to entering into an agreement with a debit processor," said Craig Watson, Senior Vice President, Account Management for PULSE. "These debit processing and network decisions deserve the same level of attention and due diligence the FI would devote to any important profit center."
Here’s a five-point plan for breaking down the decision-making process, which can reveal the leverage you have in negotiating favorable contracts:
- Proceed from a position of power. Interchange is one of the largest sources of non-interest income for financial institutions. Debit processors may want you to believe they are doing you a favor by bundling the networks they own and processing services together. In reality, additional charges and restrictions within the network rules may be limiting to the issuer. By looking at an unbundled approach, you could be leveling the playing field and forcing the debit processors to compete head-to-head on each line of business with other best-in-class options. And, don't be shy about asking what else they can do for you. The savings that result may be larger than those from bundling, with fewer strings attached.
- Determine if the offer really delivers savings. It’s typical for bundled deals to focus on supposed “savings.” However, they sometimes compare projected costs with artificially inflated fees or to fees that are “waived" with the bundle. To help evaluate the range of industry fees for each individual service, seek out objective resources like the Federal Reserve's Debit Card Issuer (DCI) survey and the annual Debit Issuer Study, commissioned by PULSE. Also, when digging into the details of a bundled contract, make sure the debit processor’s incentives aren't at odds with other services from other sources.
- Beware hidden penalties and fees. As with any service agreement, the “Other Terms and Conditions May Apply" sections of processing contracts require a special level of scrutiny. Just like you, debit processors are contending with an ever-shifting regulatory and technology landscape that often prompt changes in fees. Likewise, networks may make arbitrary rule changes that cost you more without your approval. These often hide in the fine print under terms like “royalty" or “access" fees, which can be dynamic and change with little or no notice. Another area to watch are penalties associated with tiered pricing and/or volume discounts. Price breaks from generating a higher volume of transactions can be an example of the right kind of alignment of incentives, but not if you end up paying more because the threshold isn't met in a given period.
- Insist on billing clarity. Debit processors should be able to provide complete and transparent accounting of what is pass-through and what’s not. Even in bundled programs, demand that processing and network fees be broken out separately. Bundled or unbundled, any debit network charges billed to the processor and passed on to you should be clearly marked as such. If you have a debit and credit card program with the same provider, insist that the bills be kept separate. Before finalizing a contract, require the debit processor to hand over a real (anonymized) monthly statement to ensure it provides the necessary level of clarity and transparency.
- Protect your choices. The payments world is fluid. What may seem like a great choice of networks today may not be tomorrow when new technology or more competitive interchange emerges.
"Debit program managers don't want to lock themselves into a long-term contract that limits your flexibility by heavily penalizing their FI for switching networks or adding a network," said PULSE's Watson. "If a bundle agreement contains such provisions, it should be a red flag."
Include any and all potential penalties as part of your initial cost-benefit analysis. After all, the less time you have to spend each month chasing down charges, the more time you can spend evaluating what you are paying—and earning—from your debit portfolio and confirming that the structure of the agreements is working for you.