Optimize Your Debit Program Performance: 3 Key Drivers

Business Debit

Every participant in the 2024 Debit Issuer Study issues both consumer and business debit cards. However, given the small size of business card portfolios relative to consumer cards, many issuers do not spend much time focusing on this segment. This is an opportunity with significant potential, especially for financial institutions with less than $10 billion in assets.

When a business cardholder engages with debit, their card use – and the issuer’s profitability – is often significantly higher than on the consumer side:

• The average ticket for business debit is 145% higher than consumer debit ($107.34 vs. $43.82), and annual spend per active card is almost double ($32,459 for business debit compared with $16,406 for consumer).
• For exempt issuers, business debit also can have a higher interchange rate in some cases. Multiplying a higher rate with higher spend means that business debit cards generate interchange revenue per active card that is 262% higher than consumer cards, on average.

Recommended issuer strategy

While business debit represents less than 8% of total cards on average, it generates almost 20% of an exempt issuer’s total debit interchange revenue. Given its outsized contribution to revenue, issuers are advised to track business debit performance separately from their consumer portfolio. Dedicated reporting will better equip you to identify actions to drive higher penetration, activation, and usage in your business portfolio.

For tips on tailoring your services to small businesses, download our Regulation II Issuer Guide.

Card-not-Present

In the early years of debit’s history, card use was simple to categorize; it was either PIN or signature. As uses expanded, the division between usage types shifted to card-present (CP) versus card-not-present (CNP).

Initially, these two sets of labels also indicated which type of network was used to switch a transaction. PIN transactions were typically limited to in-person merchants and were routed via back-of-card networks, while non-PIN transactions could include in-person or CNP purchases and were routed via the card-brand network. Over time, however, card use, network capabilities, and transaction routing have changed, and this requires an updated approach from issuers.

First, an overall shift toward e-commerce, combined with the rise of subscription-based services; gig-economy apps such as Uber, DoorDash, and Instacart; and in-app purchases have tilted consumers’ shopping habits increasingly toward CNP payments. Payment preference surveys indicate that consumers prefer to use debit when making such purchases, and this is reflected in the Debit Issuer Study results. In 2023, CNP use represented 36% of all debit transactions and 45% of all debit spend.

Second, issuers are now required to support two unaffiliated payment networks for all debit transactions, CP and CNP. Back-of-card networks have made significant investments to build out their capabilities to support all transactions, including CNP purchases. With more network options, e-commerce merchants are increasingly routing transactions via back-of-card networks.

Recommended issuer strategy

Issuers still operating under the old paradigm and assuming that CNP equals card-brand routing are not adequately prepared for today’s reality. Rapid growth in CNP transactions, together with expanded network routing options, requires new and updated approaches to risk management, including adjusting fraud models to reflect changing usage patterns. 

The fraud models that historically were only applied to transactions received from an issuer’s card-brand network now need to be applied to CNP activity across all networks. To do this, issuers also must accurately track CP versus CNP volume on their back-of-card network(s). Without having this information and applying fraud models accordingly, issuers risk higher fraud and decline rates.

Network selection

In the Debit Issuer Study, issuers are asked to report on the effective interchange rate they realize on debit transactions. The 2024 study found that covered issuers (those with at least $10 billion in assets) generally receive interchange that is the maximum allowable under the cap set by the Federal Reserve. If the cap is reset, as the Federal Reserve has indicated it will do, these issuers – which represent about 64% of total debit spend – will experience an immediate decrease in debit revenue.

By contrast, exempt issuer interchange varies considerably from network to network. Awareness among exempt issuers of their effective interchange rate also varies widely. Some issuers have excellent reporting and truly understand the drivers underpinning their program’s revenue. Others track the bottom line but do not monitor the levers that influence this contribution rate.

For issuers with limited visibility into their debit interchange rates, the root cause is often inadequate reporting from their processor. With sub-par reporting, many exempt issuers are unsure if their numbers are:

1. Gross or net interchange (i.e., net of network and processor fees)
2. Total interchange across all networks or card-brand activity only
3. POS interchange or a composite of POS and ATM interchange (since ATM interchange is negative for most institutions, a combined number lowers an issuer’s reported POS total)

It is essential for exempt issuers to accurately measure the economics of their debit card programs. When issuers can answer the questions above with confidence, they can select a network that offers a better return on cardholder spend. This is especially true for banks and credit unions that participate in multiple networks, where different network configurations and routing choices may result in sub-par revenue for issuers.

For exempt issuers, there are significant differences in the interchange rates that different networks deliver. An analysis of the Federal Reserve’s most recent debit interchange data reveals that PULSE consistently offers interchange income that is 10-15% above the industry average. And our low network fees further enhance the value PULSE provides.

Recommended issuer strategy

Issuers’ first step is to measure the actual interchange rate they are realizing on debit spend. This requires identifying gross POS interchange revenue by network and dividing by total approved POS purchase transactions for that network to derive the effective rates for your front-of-card and back-of-card networks. With this baseline, issuers can evaluate the competitiveness of their current providers relative to other options. 

The networks that banks and credit unions choose to participate in can have a material impact on the overall profitability of their debit programs. Complete the short form below to request a call from your PULSE Account Executive to discuss ways to improve your program’s profitability.